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New economic geography
Economics of destinations
Prof. Peter F. Keller, PhD.
Visiting professor at the University of Bergamo
Fall Semester 2017_18
Tourism Economics
Chapter 2
2.1. Tourism as a territory bound sector
2.2. Attractions and tourism potential
2.3. Specialization on tourism
2.4. Nature of competition
2.5. Destinations as clusters
2.6. Destination as market place
2.7. Promotion of the place as new paradigm
2.8.Tourism organizations
2.9. The impact of digital revolution
Content
2.1. Tourism as a territory bound sector
Why is tourism always territory bound?
Keywords
Destination image
Global demand and local supply
Local territory dependency
The destination is the place where demand and supply of tourism
related goods and services meet
Demand side view
Destinations are point of attractions which are anchored in the mindset of potential
visitors. The travel decision is based on the destination image. The image is the sum
of beliefs, ideas and impressions that a person has about a destination.
Supply side view
The point of attractions are geographical places such as countries, regions or
cities where natural, cultural and social attractions are situated. These attractions are
the resources for the creation of value in the field of tourism.
The demand is global but the supply is local
Tourism is a demand driven phenomenon. The production of tourism related goods
and services depend on freely chosen travel decisions.
The object of the travel choice is a destination with its resources. Tourism is
therefore always territory bound.
The territorial resources are part of local socio-cultural and ecological systems
which determine tourism related activities.
Climate and topography limit all economic
activities
Agriculture is mostly limited to the breeding of
livestock. The investment costs for important
industrial activities are too high. The hope to
develop ICT based home offices in mountain
areas vanished. By far not all mountain places
are suitable for developing winter sports
tourism.
Tourism as territory bound economic system depends on the local resources
The most important Alpine products
Water
Hydroelectric energy
Dairy and cheese food
Timber and minerals
Tourism
There are only few economic alternatives
to tourism in nature near leisure territories
such as mountain or beach areas
Conclusions
Tourism is by definition always territory bound. Visitors travel to a place which is
called destination.
The paradox is that the demand is more or less global since visitors can travel to
almost all places. The production of goods and services is always local.
Tourism is together with agriculture and raw material extraction industries the only
economic phenomenon which is territory bound.
Virtual tourism, so-called “travel prototyping”, can never replace the destination.
Questions to be asked
Why do we say that tourism is global and local at the same time?
What do we understand by “territory bound” when it comes to tourism?
What is the consequences of the fact that tourism is territory bound?
2.2. Tourism potential
Why does the willingness to pay of the consumers determine tourism
potential and opportunities to build tourism related supply capacities?
Keywords
Destination goods
Willingness to pay for attractions
Destination building process
Hierarchy among destinations
There are given and man-made resources which attract visitors
First nature (physical geography)
Mountains, ski slopes
Sea, lakes, beaches
Rivers
Landscape
Climate
Second nature (man-made)
Towns, villages
Ports
Man-made landscape
Disneyland
Hotels
Destinations
Territory bound attractions Man made attractions
Attractions can be public and private destinations goods
Destination goods
Tourism related supply
Public goods
- Landscapes,
- culture, nature
Social resources
– Restaurant on
public places
Positive externalities
- Flower decoration
Private goods
- Hotels
Attractions determine the willingness to pay Attractions determine the willingness to pay
Cervino Swiss-Italian Alps Città Alta Bergamo
Principles of destination building
Growth factors
Agglomeration impacts
Increased returns
Endogenous Exogenous
Market potential
Transport and time costs
Destination as
growth pole
Exogenous demand driven factors make a resort accessible and endogenous
supply driven factors influence the size of a destination
„Value based pricing“
Unique Attractions
Differentiation Willingness to pay
Value of a brand as a rent
of a destination’s SMEs
Margin for prices above
those of the market
„Branding“
Willingness to pay for attractions give the destination its value
The attractions determine the size of the destination
Attractions
Agglomeration impacts
Bigger firms
External economies Increased returns
Bigger destination
Exercise: Petra, UNESCO Cultural heritage in the middle of Jordan’s desert
Why are there several 5 und 4 star hotels?
Marriott *****
Mövenpick Hotel &Resort *****
etc.
Berne: UNESCO World heritage
Bernese farm in the hinterland
Source: Prof. Peter Keller, HEC / UNIL
There is a hierarchy between destinations depending on the number and
the importance of the attractions
Big destination throw a shadow on the hinterland
Price equalizes supply and demand
Equalisation via prices: - Prices for tourism services
- Mark-up for destination goods
Destination goods Tourism demand
Price
Conclusion
Destination goods are resources which attract visitors.
Visitors are willing to pay for attractions which give a destination its value in the form of a
brand and allows companies to use “value based pricing”.
The importance of the attractions determine through increased returns and external
economies the size of a destination.
There is a hierarchy between destinations which depends on the number and the
importance of their attractions
The price is the variable which links the supply of destinations of destination goods with
the visitors’ demand.
Questions to be asked
What is a destination good?
What does determine the willingness to pay of visitors?
What are the profits from companies operating under the umbrella of the
destination?
What do we understand by « increasing returns » and « external economies »?
How does the building of destination function?
Why do we have a hierarchy among destinations?
2.3. Specialisation of countries and places on tourism
Do all countries have international tourism?
Keywords
Widespread attractions and decentralisation of international tourism
Advanced, catching up, raw material, Malthusian and isolated economies
Concentration on the best destination
International tourism is wide spread and not concentrated in only few
countries such as the other industries
Most of the countries profit from international tourism whether they are rich or
poor, open to the world or isolated. Raw material producers suffering from the
Dutch disease which means high service prices, attract also successfully
international visitors.
The reason is that most of the countries have either natural and cultural or
manmade unique attractions which are economically considered as „factor
endowments“.
Attractions are situated all over the world which contributes to a decentralised
tourism supply on worldwide scale
Highly developed countries
„Catching up“ developing countries
Raw material producer countries
Malthusian countries
Countries with
isolated economies
France
Thailand
Russia
Cambodia
Kyrgyzstan
77,148 10,872 20,271 2,399 1,316
USA Turkey United Arab
Emirates
Nepal Uzbekistan
59,793 27,000 7,432 0,603 0,975
There is a concentration on the best places
under conditions of global competition
REF_Hec_Tourism_Systems_ITD_032706
Leysin Ollon
Adelboden Lenk
Zermatt
Klosters-Serneus
Saanen
Laax
Engadin
Davos Scuol
Sammnaun
Bagnes
Saas Fee
Engelberg
Grindelwald
Lauterbrunnen
Disentis/ Mustér Arosa
Vaz/Obervaz
Montana
Hasliberg
Leukerbad
Conclusions
The reason why almost all countries of the world have international leisure tourism is the
fact that they have attractions which visitors want to see.
Furthermore, the world is no more closed. There are multiple physical contacts of
human beeings due to business, sports, politics and many other activities. Video
conferences cannot replace tourism.
For these reasons, there is no country which exists without offering tourism facilities
since it would not survive without exchange.
Questions to be asked
Why do most of countries receive visitors?
How can you explain the strong position of tourism in the balance of trade and
services?
Why is there a concentration on the best places in the field of leisure tourism?
2.4. The nature of competition between destinations
Why is the competition among destinations imperfect?
Keywords
First and second competition
Imperfect and monopolistic competition
Uniqueness and differentiation strategy
There is a first competition among destinations and only then a second
competition between the companies of a given place
There is a first competition between destinations when it comes to the travel
choice of the visitors.
There is a second competition between companies operating under the umbrella of
the destination.
Exercise: First and second competition
What do potential visitors choose first and why?
?
The uniqueness of destinations makes competition imperfect and
asks for a differentiation strategy
Monopolistic character
of competition
Differentiation strategy for
destinations
Uniqueness
of destinations
Conclusions
There is no perfect or total competition among hotels, restaurants, cable cars or
museums. The reason is that the provider of services can profit from the destination.
They operate under the umbrella of the destination.
The reason is that visitors choose first the destination where they want to go. They
compose only after this choice the bundle of services they need for travelling and
staying at another place than their own.
These facts make that competition is imperfect which means it is not total. The
destination protects the companies from to much competition.
Questions to be asked
How do we define “perfect” and “imperfect” competition?
What is a quasi-monopolistic competition?
What kind of competition takes places if the hotel is the destination?
2.5. Destinations are clusters
What are cluster advantages?
Keywords
Cluster advantages
Commonalities and externalities
Porter’s diamond
A cluster is a geographical proximate group of interconnected companies and
associated institutions in a particular field such as tourism, linked by
commonalities and profiting from externalities.
Commonalities are common tradition, explicit and implicit knowledge and the
proximity to visitors and competitors. Externalities are unintended impacts of the
destination building process which are in favor of the companies being part of the
cluster. Such externalities are e g external economies such a higher returns because
of outstanding attractions or agglomeration impacts such as a shopping street or an
airport.
Commonalities and externalities induce cluster advantages.
Destinations are clusters where companies are linked by commonalities
and externalities
Destinations are the resultant of a long specialisation processes
Experience to survive in
a competitive
environment
High level of quality of
providers
Destination Increasing number of
critical visitors with a lot
of experience
Long specialisation
process
Adapted and simplified diamond:
Porter, M. (2000), The competitive advantage of nations, Macmillan 1990
Clusters are in general the result of a long specialization processes to whom all
the companies operating in tourism contribute without loosing their independence.
In contrary, the fact that they fight for attracting the same visitors makes of them
competitors and forces them to be innovative and quality minded. They have to
survive in a very competitive environment.
Destinations profit from critical repeater who are a sort of test market.
The companies profit also from the quality of external providers of goods and
services.
The building of clusters is the result of long specialisation processes
Destinations are clusters of all companies operating under the umbrella of the
destination.
The fact that they fight for attracting the same visitors makes of them competitors
and forces them to be innovative and quality minded. They have to survive in a
very competitive environment.
Companies can internalise cluster advantages into their products
Conclusions
Clusters are places which are specialised on one or other sector or industry. The
companies being part of the cluster develop together during the long process of
specialisation commonalities and externalities.
They have a common past and know each other very well. They share the same
explicit and implicit knowledge about a given place.
They profit from the advantage to be part of cluster in the form of contacts,
networks and the willingness to cooperate of the partners who are all interested
that the cluster survives.
Questions to be asked
What is cluster?
What are commonalities and externalities in the field of clusters?
What are cluster advantages?
What do we understand by the “Diamond” of Porter?
2.6. Destinations are market places
Are destinations company-like or just a market structure?
Keywords
Market place
Resorts and traditional destinations
Standardisation against multi-optional supply
Destinations are in general market places
Destinations are places where consumers meet the producers. The consumers
are “prosumers” since they bundle their own product with the help of the providers of
services.
They can leave the task of bundling the services to tour operators which deal
then as intermediary and on behalf of the visitors with the local producers.
The providers of services of a destination are in a permanent competition between
each other for attracting and serving visitors.
Destination offer either multitude of goods or services or a single
bundle of services (product)
Destination with multi-optional offer
and numerous independent small
companies
Traditional destinations
in leisure tourism regions
Destinations with one product owned
and managed by one firm
Cruise ships
Theme parks
Golf or and beach resorts
Whistler Mountain
Horizontal and vertical cooperation at the level of the destination for
gaining size and offering more
Sports
etc.
Casinos
Restaurants
Hotels
Transportation
Products
Industries
Horizontal
cooperation
between tourism
related firms
Vertical cooperation at the level of the destination
Bergamo Lombardia Italy
Horizontal and vertical cooperation under the umbrella of the destination
is a must for SME’s
The competitive unit of the market place is the company which has to cooperate
horizontally and vertically if it wants to profit from the advantages the destination
provides. Horizontal cooperation means to cooperate with companies of the same
industry for gaining economies of scale. Vertical cooperation means to cooperate at the
level of the destination.
If horizontal and vertical cooperation is successful, destinations with multi-optional
offer can do as well as integrated resort. They can overcome the negative impact of
the small size of their firms by cooperation which increases their market power and
improves their competitive position.
The competitive unit is the individual company in the destination
The destination is a market place but in most cases not the competitive unit.
The competitive unit is the company which operates in the cluster and
promotes its product under the umbrella of the destination.
There are destinations which are steered from one development and management
company such as “Vails Mountain Resorts” in Colorado, USA. In this case, the
destination and the company are in the same hand and unified.
Destinations can be managed such as a company
Vail Resorts is the biggest mountain resort
management company of the world
Why did Vail Resorts (USA) acquire in August 2016 100% of the shares of Whistler-
Blackcomb (Can) for 1.1 billion US Dollars
for becoming the biggest resort of Northern America?
Exercise: Mammoth acquisition of Whistler-Blackcomb ski area (Can)
by Vail Mountain Resorts (USA)
Conclusions
Destinations are market places where consumer and producer meet. Consumer buy on
place their bundle of services from the producers. This is the case in all traditional resorts
with a multi-optional supply.
There are destinations where one company produces or manages all the services.
These destinations are called “resorts”. The French mono-functional ski resorts were the first
destination built and controlled by one development or management company.
Both kind of destination can work well. The multi-optional destinations offer more
possibilities of choice. The resorts can better control and guarantee the bundle of
services they offer or sell.
Questions to be asked
Why do we say that destinations are market places?
What is the advantage of a traditional destination?
What are the opportunities and threats of resorts built and managed by one
company?
2.7. Promotion of the place as new paradigma
Can all the promotion activities for a place be bundled and integrated
in one organisational form?
Keywords
Country brand
Focus and instruments of promotion of the place
Synergies between organisations in the field of promotion of the place
Globalisation mobilised governments
to promote places for staying competitive
Optimal use of the available resources
Additional growth and employment
Improving the
framework conditions
Targeted promotion
of the place
Competition between states
and places
inside the country outside the country
Promotion of the place
Wealth and quality of life
Promotion of the place can help to promote the country as business location,
export, working and holiday place
Image of the state
Influence of opinon leaders
Foreign consumers
Attraction of visitors
Promotion of agricultural
products
Foreign companies
Location promtion
Export promotion
Creation of employment and income for the resident population
Country image depends on excellency and promotion
Recognition
&
Reputation
Economic, cultural and political performances
Promotion of the place can enhance the existing image
cCreate
Reinforce
The criteria of the Anholt-GfK Country Brand Index
Italy is in the top
10 countries!
Page - 63
The impact of promotion of the place are questionable:
the case of Switzerland
Swiss Cheese
Marketing AG SCM
Conclusions
The coordinated or even integrated promotion of places is a concept which is not
yet introduced on the country level. The efforts to promote tourism, economy, culture
It makes sense to promote places under one umbrella for attracting visitors, scientists,
managers or professionals from abroad and for pushing exports of industrial or agricultural
goods.
All the actors of the promotion of the place could profit from strong country brand even if
the promotion of each sector has a different character. Tourism promotion is largely
directed to the large public.
It is also worthwhile to share the administration and the logistics in order to win
economies of scale and scope for reducing the costs and increasing the scope of the
promotional activities.
Questions to be asked
What do we understand by “promotion of the place”?
Why is there a competition among states for attracting foreign resources to a given
country?
What would be the advantages of an integrated promotion of the place?
Why is “promotion of the place” not yet established in advanced economies?
2.8. Tourism organisations
What are the principles for organising international tourism
promotion?
Keywords
Local, regional and national tourism organisation
Complementary and subsidiary destination promotion
Business models and instruments
Marketing funnel and strategies
The complementary and subsidiary mission of National Tourism
Organisations (NTO’s)
Tourism organisations are responsible for destination promotion which is
complementary and subsidiary to the promotion of the tourism related
companies and industries. They have often be created with the help of the state and
his sub territorial levels by the professional association of tourism.
Their mission is the promotion of destination by adapting and using all the
techniques of market communication.
There is a need for effective and efficient NTO’s
operating near to the tourism market
Destination promotion is not a political affair but market near activity that needs
expertise in tourism, communication and marketing.
Tourism organizations should have a vision and elaborate business models and
plans which indicate their major strategies, partnerships and financial tools and
receipts.
The business model of NTO’s is varying from country to country reflecting
different factors such as the experience with promoting tourism countries, the level of
development and the existing expertise.
Business model for the activities of NTO’s
Total Impact on contacts, page views,
flows and returns etc.
GU
ESTS
Use of funds
Marketing- program-
costs
Operating- costs
Enhancing profile and status of the brand
Stimulation of the demand through
sales promotion
MARKETING-ACTIVITIES
MARKETING-ACTIVITIES
STA
TE
The business model shows the scope of the country marketing in the field
of tourism
The business model summarize the strategic activities of an NTO in a simple way.
The NTO sees itself as the leader of the tourism brand. The organisation is trying to
bundle all the communication efforts when it comes to promote the country abroad.
An important focus is led to the sales promotion. The NTO should be as near to the
market as possible. The organisation has the ambition to follow the visitor from the travel
choice to the stay and to decision of coming back.
The business model reflects also that the NTO is commissioned by the state which is
– together with the commercial partners and the destinations – funding the activities.
The marketing of countries has to be a customer driven process
The marketing of tourism countries is customer driven. It has to be considered as a
process which can be represented by the following marketing funnel:
Analysing markets and advice for developing products
Getting attention
Creating interest and sympathy
Stimulating needs
Putting products on the market
Realising bookings
Keeping the visitor loyal
Exercise: The marketing strategy of the Swiss National Tourism Office
What is new?
Guest
E-Marketing
Key Media Management
Key Account Management
Promotion
Possible marketing mix of NTO’s which use the whole spectrum of media
for making visitors travel to their countries
Globalisation allowed traditional countries to explore successfully
new markets: the case of Switzerland
Market Growth of visitors nights Growth of the expenditure
2008-2012 2013-2017
Brazil 34.1% 20.3%
China 98.5% 90.7%
GCC 44.0% 24.0%
India 39.8% 78.4%
Poland 48.2% 24.3%
Russia 40.4% 30.0%
The sophisticated way to index market potential (Index: 0-100) by
Switzerland Tourism
Quelle: BFS Statistik (LN Entwicklung); ST / Tourism Monitor Switzerland 2010 (Anteil Erstbesucher & Durchschnittsalter < 35); IMF/WEO 2012 (GDP Wachstum); United States Census Bureau – IDB 2012 (Bevölkerungswachstum).
Criteria for the evaluation of market potential of countries of origin of visitors
Economy Macro-economic data (Inflation&Unemployment)
Currency Currency in relation to the destination
Substitution Possibility to outsource market activities to partners
Repeaters Part of repeaters (high part=low marketing costs)
Opening costs Cost of production, personal, taxes etc.
Accessibility Direct flights, Visa duties
Attractivness Quantitative and qualitative potential of the market
Advantage Competitive advantage in comparison with competitors
Seasonality Guests for intermediary and summer season are more interesting
Expenditure Average daily expenditure
There is general criticism from economist about the effectiveness and
efficiency of the promotion of places and destinations
Promotion of destinations is in advanced, innovative, efficient and open economies not
necessary. They can bring more export and visits. But the highly profitable and productive
projects, exports and visits take place without the help of the state.
The positive impacts of place and destination promotion are quantitative and not qualitative.
More quantities need additional workers which cannot be found on the labour market
when there is full employment.
Measures for the promotion of the place led to a higher income but also a higher
population. They do not increase the income per capita.
The impact of the promotion of the place on resources such as ground, infrastructure or
environment is negative.
Page - 79
Increasing international tourism increase the prices of internal tourism of the residents in a given country
Price (costs)
Revenues
E2
D2 D1
E1
Di A
P1
P2 C
B
S
Di = Internal demand Di = Internal and foreign
demand D2 = Effect of promotion
abroad S = Touristic supply E = Equilibrium of
demand/supply, marginal price/costs
Conclusions
The internationalisation of tourism increased the necessity to have effective and
efficient National Tourism Organisations (NTO).
NTO`s are brand leader of countries. They bundle the communication measure of the
private or half-private partners under the umbrella of the country destination.
NTO’s are the forerunners in the field of the application of ICT to tourism promotion.
They can track visitors from their travel decision to their return home.
Only few states control the performance of their NTO’s in a effective and efficient
way.
Questions to be asked
What do we mean by “complementary” and “subsidiary” role of NTO’s?
What is a marketing funnel?
Which are the criteria for opening and developing new markets?
What are the impacts of strong incoming tourism on the tourism prices in a given
country?
2.9. Digital revolution in the field of destination marketing
How does digital revolution change destination marketing?
Keywords
Technological innovation
New sovereignty of the consumer/visitor
Multimedia and travel prototyping
Multifunctional destination websites
Enlargement of the internet with second-
generation websites
Social Media
Wikis
Music and picture sharing platforms
Virtual games
Use of the internet via mobile
devices
Applications based on
Augmented reality
Location based services
Interface between tourism organization, TOs & TAs, and customer
Provide visitor with product information and booking facilities Support tourism enterprises to integrate into the tourism
The technological cycles in the field of ICT are getting shorter and
shorter and new e-markets are coming up
NTO’s and DMO’s are obliged to adapt to ICT innovation for attracting visitors
There are new possibilities to interact between visitors and providers of
services
« Mobile computing” assures information on place and allows to
communicate
NTO’s adapt to new ICT by “trial and error”. The investments in equipment, software and
human resources are heavy. The big portals of information, evaluation and booking compete
national and local information and reservation systems. The distribution costs will increase.
The way potential visitors inform themselves is changing
The sovereign consumer
“Web 2.0” created the consumer who produces its content himself. The visitors depend
less on the informations of the provider of services and win market power. “Web 3.0” will
offer them advice from provider of services on how and where to consume.
The price transparent hotel and destination evaluation system
The well established hotel and destination evaluation system provide potential visitors
with neutral transparency offer and prices. They have an impact on the reputation of
companies and organisations.
A credibility revolution took place
and increased the importance of social media
Potential visitors believe more to other visitors than to experts, tourism organisations
or companies. NTO’s and DMO’s are obliged to promote in a targeted way the
social media engagement of potential visitors by integrating “User Generated
Content” into its online and offline communication.
Example of the Switzerland Tourism:
The Swiss NTO has a social media strategy for “friends & followers” by using the hash
tag #INNAMORATIDELLASVIZZERA. The organisation put the stories of the Swiss
lovers worldwide on a “love map”.
Exercise: Role of the influencers in the travel decision process
Why are influencers the new ambassadors for tourism destinations?
Ranveer Singh, Urban India Actor, Influencer, Trendsetter 8.3 million fan on facebook 4.5 million fans on Twitte 7.2 million fans on instagram
The product must be shown
Photo gallery/videos/virtual visits/webcams, short texts with pricing and direct link to
bookings
Text in using multimedia + social medias on the web.
It is necessary to make potential visitors dream
eCommunication by
photograph and movies is
crucial
Vatnajökull, the largest ice cap in Island
Picture: Ragnar Th.Sigurðsson / Barcroft Media
The e marketing strategy should allow to accompany the potential visitor
before, during and after the travelling
Function of a web site for a destination
Dream Plan Go Come back
Audio-visuel
systems
Hotel Evaluation
system
Booking systems
Repeater system
CRM
Fa
Cornerstones of E-marketing on destination level
Make access easy (“searching engine”)
Give advice to potential visitors
Seduce potential visitors by multimedia tools
Communicate with the visitors
Cooperate with the partners by intranet
Gather common information in one date bank
Assure a worldwide distribution of the information
Creation of a eMarket
„Holiday homes of Switzerland“
t
Deskline REKA TOMAS Tiscover Interhome other
STNet
MetaDirectory
diverse
systems
STNet
suppliers
eMarketing contributes to internationalise tourism
The portal of Switzerland Tourism offers online 20’000 holiday appartements and villas to
foreign visitors with great success. These forms of accomodation are booked on internet by
60% of the customers
Conclusion
The digitalisation transforms the way potential visitors have to be attracted by tourism
organisations. They play an important role in e-marketing since they are the early
adapters of technological change to tourism in the real world.
Potential visitors are nowadays sovereign consumers. They believe more to peers by
using social medias and their ambassadors for travel decisions and consumption of
tourism related services.
Multimedia makes potential visitors dream and must be integrated in websites which
are multifunctional by creating dreams, giving information, allowing book and bringing
back customers for a second trip to the same destination.
Questions to be asked
Why do we say that visitors are “sovereign”?
What do we mean by “early adapters” of technological ICT change?
Why is multimedia so important for the travel decision process ?
What should a website of a tourism organisation include?
Are NTO’s and DMO’s still necessary in the era of online tour operators and
booking portals?
Reader:
Keller, P. (2009), Destination marketing, 3rd Advance in Tourism Marketing Conference,
Bournemouth, September
References:
Vanhove, N. (2011), The economics of tourism destinations, Second edition, Elsevier Insights,
London
Krugman, P. (1990), Increasing Returns and Economic Geography, NBER Working Papers
3275, National Bureau of Economic Research, Inc.
References and reader