Market StructuresMarket Structures

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Three types of markets in tourism sector

I. Perfect and Pure CompetitionII. MonopoliesIII. Oligopoly and other imperfect competition

I. Perfect Competition

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Perfectly competitive marketsFrom the seller’s point of view:

the situation where that seller is faced with a market-set price level...

they can sell all their output at that price; that is, the seller faces a horizontal individual demand schedule (curve)

But, they cannot attempt to sell at a higher price since buyers would immediately move to other -perfect - substitutes.

I.I. PerfectPerfect Competition CompetitionIndividual enterprise’s demand in perfect competition

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Price

per unit

P1

Quantity of

enterprise’s product

I. Perfect CompetitionI. Perfect Competition

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This situation is rarely related to industries other than agriculture, where many small producers are ‘price takers but quantity makers’.

The situation nearest to this in travel and tourism may be taxi operators in major cities, or small motels or hotels in very large holiday destinations.

I. Perfect CompetitionPerfect Competition

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However, there may be an acceptable price band within which sellers will operate, as on their own they do not possess enough power in the market place, nor quite enough individuality to set prices at any level they wish.

This is a form of imperfect imperfect competitioncompetition, close to pure competition.

Perfect CompetitionPerfect Competition: Sample demand schedule for small motel in imperfect competition

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Price

per unit

Pm

0 Qf Quantity of rooms

I. Perfect CompetitionPerfect Competition

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From the figure;PmPm is the effective maximum price that

the motel can charge before finding that its product attributes can no longer outweigh the cheaper rates of its rivals.

QFQF is full capacity – every unit occupied. The stepped stepped demand schedule shows the

range of price variationrange of price variation open to the motel (stepped nature assuming ‘sticky’ demand in response to small price changes).

I. Perfect Perfect CompetitionCompetition

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While this structure describe well-defined competitive sectors within destinations, such as taxi services, taxi services, motels and souvenir outletsmotels and souvenir outlets

market structures in travel and tourism generally are complicated by:

the difficulty of defining defining productsproducts, and hence sectors

the geographical boundsgeographical bounds of markets and location of producers and consumers, especially where international tourism is involved.

I. Perfect CompetitionPerfect Competition

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Many enterprises transcend national frontiers, and may operate in different different market structuresmarket structures within different different countries countries

It is therefore necessary to consider the effects of market structure on travel and tourism enterprises within eachwithin each consuming marketconsuming market, and if possible for each variety of group of products as well.

II. MonopolyII. Monopoly

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* A monopoly can be said to exist when the substitutessubstitutes are:

not available at the time required time required ornot price-attainableprice-attainable by consumers orsufficiently differentdifferent in their attributes to be

regarded as unsatisfactory in meeting consumer demand objectives.

* A monopolist has the opportunity to set opportunity to set priceprice or prices only with regard to its own enterprise’s costs and objectives, and in the light of market demand.

II. MonopolyII. Monopoly

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Lack of competition allows freedom in decision makingdecision making, and for this reason many enterprises seek monopolistic trading positions. It is often relatively easy to do this in travel and tourism where products can be differentiated:

in fact, by service, locational or other service, locational or other characteristicscharacteristics

in consumers’ perceptionsperceptions, especially of untried travel and tourism services, by sophisticated product-positioning product-positioning promotionpromotion.

II. MonopolyMonopoly

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Another major strategy open to a monopolist is price discrimination-price discrimination- the setting of different prices to different market segments. Classically, this is possible only

where market segmentation market segmentation can take place, and where products are buyer-specificbuyer-specific Example: a carrier (an airline) identifies

business travelers business travelers and leisure leisure tourists tourists as its two main market segments on a particular route.

II. MonopolyMonopoly

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The business travelers may have to make their trips, hence demand is rather inelasticinelastic, whereas recreational tourism may be more optionaloptional and hence price-elastic. price-elastic.

Classical economic theory dictates that to obtain profit maximizationprofit maximization, the airline should fix fares to equate the levels of marginal revenue in the two markets.

II. Monopoly: Fares set by price-discriminating Fares set by price-discriminating airlineairline

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Fare A

P1

C P2

B

Q1 Q2 Quantity of seats sold

II. MonopolyMonopoly

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If demand in the two markets is aggregated

the line AB represents the demand schedule for Business TravelBusiness Travel

the line CD the additional Leisue TLeisue Travel ravel demand PP11 represents the airfare for business travelers and PP22 that for vacationers. the corresponding quantities of seats Q1 and Q2 are

sold to business travelers business travelers and vacationersvacationers respectively the airline's total revenue is P22Q22 + (P1 – P2)Q1,

whereas by selling all at fare P1 it would only make P1Q1. The extra ‘bitebite’ of revenue cuts into consumers’ consumers’ surplussurplus

III. OligopolyIII. Oligopoly

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Oligopoly is a market structure where;supply is completely or predominantly

controlled by a small number of small number of enterprisesenterprises.

each firm has a substantial market sharesubstantial market share, will be sensitive to each others supply sensitive to each others supply

decisionsdecisions and may or may not compete intensivelycompete intensively.

In such sectors there is said to be a high degree of concentration degree of concentration of enterprises.

III. OligopolyIII. Oligopoly

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Profit or revenue maximizers often face a 'kinked' demand schedule

where an enterprise currently selling quantity of output (Q1) at a certain price (P1)

it is faced with an inelastic demandinelastic demand should if it decreases its prices, but

elastic demandelastic demand if it increases them.

An oligopolist’s ‘kinked’ demand schedule

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Price

A

P1 B

C

Q1 Quantityof output

III. OligopolyIII. Oligopoly

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Competitors match quickly any priceprice reductionsreductions, as their market shares would otherwise be eroded (lost)

If the enterprise raises price above P1, since others will not follow, it loses market share to its now cheaper competitors.

This explains ''stickinessstickiness'' of prices in oligopolistic markets; however, imperfect consumer perceptions and differences in product characteristics often allow some price variation without retaliation (any response by competitors).

III. OligopolyIII. Oligopoly

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This situation is common in travel and tourism markets.

For example, to Northern EuropeansNorthern Europeans, there is a small number of competitive countries which may be regarded as sun, sea and sun, sea and sand sand destinations at inexpensive prices.

Each country keeps a close eye on the others’ tourismothers’ tourism productsproducts, , marketing marketing activityactivity, , pricesprices and comparative exchange rates.

III. OligopolyIII. Oligopoly

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The worldwide international market for car rentalcar rental is dominated by not more than half-a-dozen firms, including Avis, Budget, Avis, Budget, Europcar/National and Hertz. Europcar/National and Hertz.

These firms have demonstrated extreme sensitivitysensitivity to competitive activity from each other, and consequently end up with very similar product lines and tariff ratesproduct lines and tariff rates; this ensures market stability.

III. OligopolyIII. Oligopoly

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To avoid a ‘price war‘price war’ oligopolists may overtly, or covertly,overtly, or covertly, agreeagree not to compete on price and possibly agree to restrict competition further with quota or market-sharing arrangementsmarket-sharing arrangements.

Such an agreement, if overt, is a cartelcartel, and is generally not permitted by national governments and it is considered to restrain free restrain free trade.

However, these type of activities are still frequently found in travel and tourism.

AssignmentAssignment You are supposed to enter web pages to search for

monopolistic, oligopolistic or (if exists) competitive firms and sectors in tourism.

The web pages can be searched on;- Car rental companies (easycareasycar)- Hotel firms (HRSHRS) - Airlines (Travelocity, Expedia, Tripadviser Travelocity, Expedia, Tripadviser etc.)

All price (fare, charge, rate) searches should be based on product homogenity (similar characteristics).

The objective is to identify price differences or similarities.

Submit a short report to lecturer (orhan.icoz@yasar.edu.tr)

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