1. 1 DEMAND FOR TOURISM Contents 1. Nature of Demand 2. Travel and Tourism Products 3. Buyer Objectives 4. Types of Variables Influencing and Constraining Tourism Demand 5. Levels of Choice in tourism industry Demand 6. Constraints on Tourism Demand33

2. 2 Definitions of tourism demand  Definitions of demand vary according to the subject perspective of the author.  For example, economists consider demand to be schedule of the amount of any product or service that people are willing and able to buy at each specific price in a set possible prices during a specified period of time.

3. 3  In contrast psychologists view demand from the perspective of motivation and behavior.  Geographers, on the other hand define tourist demand as: the total number of persons who travel, or wish to travel to use tourist facilities and services at places away from their places of work and residence.

4. 4 Definitions of tourism demand Each approach is useful.  The economic approach introduces the idea of elasticity – which describes the relationship between demand and price, or other variable.  The geographer’s definition implies a wide range of influences, in addition to price, as determinants of demand and includes not only those who actually participate in tourism, but also those who wish to, but for some reason do not.  On the other hand, the psychologist scratches underneath the skin of the tourist to examine the interaction of personality, environment and demand for tourism.

5. 5 Concepts of Tourism Demand The demand for tourism consists of a number of components that make up the total demand for tourism: The demand for tourism consists of a number of components that make up the total demand for tourism: 1. Effective or actual demand is the actual number of participants in tourism or those who are traveling, i.e. de facto tourists. This is the component of demand most commonly and easily measured and the bulk of tourism statistics refer to effective demand. 2. Suppressed demand is made up of that section of the population who do not travel for some reason.

6. 6 Concepts of tourism demand  Two elements of suppressed demand can be distinguished.  Firstly, potential demand refers to those who will travel at some future date if they experience a change in their circumstances.  For example, their purchasing power may increase, or they may receive more paid holiday entitlements, and they therefore have the potential to move into the effective demand category.

7. 7  Deferred demand is a demand postponed because of a problem in the supply environment, such as a lack of capacity in accommodations or maybe terrorists activity.  Again this implies that when the supply conditions are more favorable, those in the deferred demand category will convert to effective demand at some future date. 3. Finally, there will always be those who simply do not wish to travel, constituting a category of no demand Concepts of tourism demand

8. 8  We can also consider other ways in which demand for tourism may be viewed.  For example, substitution of demand refers to the case when demand for one activity (a self- catering holiday) is substituted by another (staying at a serviced accommodation).  A similar concept is redirection of demand where the geographical location of demand is changed – a trip to Spain is redirected to Greece because of over-booking of accommodation.

9. 9  Finally the opening of new tourism supply - - will:  Finally the opening of new tourism supply - say a resort attraction or accommodation - will:  redirect demand from similar facilities in the area;  substitute demand from other facilities; and  generate new demand. Concepts of tourism demand

10. 10 Concepts of tourism demand  Economists refer to the first two of these as the displacement effect – in other words, demand from other facilities is displaced to the new one and no extra demand is generated.  This can be a problem in tourism and is an important consideration when appraising the worth of new tourism projects.

11. 11 The Nature of Tourism Demand  Aggregate Demand: the quantities of a product that buyers collectively are willing and able to buy at any potential price over some specified period of time. Specifically a definition of effective demand.  A behavioral approach to demand analysis is important in tourism industry since the products are complex and the needs and levels of product knowledge of intending tourists are many and varied.

12. 12 Travel and Tourism Products Different views on tourism industry products: Different views on tourism industry products: 1. As a total package or set of complementary products which buyer views as a single purchase, considered for example as the “dream experience” – reflects tourist purchasing behavior in the repurchase stage 2. As an individual product, which are complements, certainly but are considered separately by tourists in making their purchase decisions – reflects routinized buying of, for example car rental services and meals by a business person in the course of a trip.

13. 13 TOURISM DEMAND Variables Influencing and Constraining Tourism Demand Generating Area Economic Variables (Group A) Destination Economic Variables (Group B) Link Variables (Group C) Personal disposable income levels General price level Comparative prices between generator and destination Distribution of incomes Degree of supply competition Promotional effort by destination in generating area Holiday entitlements Quality of tourism products Exchange rate Value of currency Economic regulation of tourists Time/cost of travel Tax policy and controls on tourist spending

14. 14 Levels of Choice in Tourism Demand In considering the demand for a simple good, individual consumers have to make two decisions: In considering the demand for a simple good, individual consumers have to make two decisions: 1. Whether or not to purchase that generic type of good 2. Which particular good to choose from the range of substitutes available In tourism, there are several levels of choice: (a) the overall type of tourism required (b) destination (c) travel mode (d) accommodation and attraction visiting (e) purchasing method or distribution channel.

15. 15 TOURISM DEMAND 5. Levels of Choice in Tourism Demand  A. Type of tourism required:  For many cases, there is no-choice situation. i.e., a business sales trip, pilgrimage, sports event attendance or invitation to a family wedding. The degree of obligation fixes the decision.  In other cases, there may be choices such as a beach or touring vacation, winter cruise, taking a post convention tour.

16. 16 TOURISM DEMAND 5. Levels of Choice in Tourism Demand  B. Destination: A destination may be a single location, a set of locations as part of tour, or even a “moving” destination such as a cruise. A destination may be a single location, a set of locations as part of tour, or even a “moving” destination such as a cruise. Individual demand depends on the group B and C variables and the consumption technology of the destination Individual demand depends on the group B and C variables and the consumption technology of the destination Relative prices is the most significant variable in international destination choice Relative prices is the most significant variable in international destination choice

17. 17 TOURISM DEMAND 5. Levels of Choice in Tourism Demand  B. Destination (contd.): The degree of substitution between destinations will depend on the similarity of the characteristic set The degree of substitution between destinations will depend on the similarity of the characteristic set Choice is frequently restricted by imperfections in consumer knowledge about, and perceptions in destinations. Choice is frequently restricted by imperfections in consumer knowledge about, and perceptions in destinations.

18. 18 TOURISM DEMAND 5. Levels of Choice in Tourism Demand  C. Travel Mode:  Frequently, type of trip and destination dictate a particular travel mode  There may be desired levels of speed, convenience, comfort, safety and so on  The principal constraints could be price and the length of time available

19. 19 TOURISM DEMAND 5. Levels of Choice in Tourism Demand  C. Travel Mode (contd.):  For some market segments travel itself may have a high positive utility and for others all time and money spent on travel is a cost  The travel mode may include more than one type of carriage

20. 20 TOURISM DEMAND 5. Levels of Choice in Tourism Demand  D. Accommodation and attractions:  the choice may become fixed in the light of other tourism decisions.  the lodging product includes a large bundle of intangible and service characteristics  accommodation costs are likely to be the largest element of total destination (group B variable) costs  relative price of lodging can often influence destination perceptions and destination demand.

21. 21 TOURISM DEMAND 5. Levels of Choice in Demand TOURISM DEMAND 5. Levels of Choice in Tourism Demand  D. Accommodation and attractions (cont.) an intrinsic (essential) part of the tourist trip; an intrinsic (essential) part of the tourist trip; demand is price-sensitive demand is price-sensitive a motivation in its own right; a motivation in its own right; i.e., non-tradable public products, free resource- based attractions. Price: user-pays İt is an optional discretionary extra; İt is an optional discretionary extra; Demand is influenced by either the absolute (in- destination) price or the price of the product relative to that in generating areas.

22. 22 TOURISM DEMAND 5. Levels of Choice in Tourism Demand E. Purchasing method: what type of retail outlet to use: the choices are what type of retail outlet to use: the choices are a) Whether to buy an inclusive package (IT) or separate services b) Whether to buy direct from suppliers, such as airlines or hotels or use an agent c) Which tour wholesaler or operator, or agent to use.

23. 23 TOURISM DEMAND 6. Constraints on Tourism Demand  Money; disposable income, business cash flow or stock of liquid assets such as savings  Political controls; passport and visa systems, price and fare regulation and travel and tourism taxes  Time; work and public holiday allowance, school and college vacation periods, time limits on conducting business trips

24. 24 Indicators of tourism demand Travel propensity  One of the most useful indicators of effective demand in any particular population is travel propensity.  This measure simply considers the penetration of tourism trips in a population.  There are two forms of travel propensity:

25. 25 Travel propensity  Net travel propensity refers to the percentage of the population that takes at least one tourism trip in a given period of time.  In other words it is a measure of the penetration of travel among individuals in the population.

26. 26 Travel propensity  The suppressed and no demand components will therefore ensure that net travel propensity never approaches 100 % and a figure of 70 % or 80 % is likely to be maximum for developed Western economies.

27. 27 Travel propensity  Gross Travel Propensity gives the total number of tourism trips taken as a percentage of the population.  This is a measure of the penetration of trips not individual travelers.

28. 28 Travel propensity  Clearly then as second and third holidays increase in importance so gross travel propensity becomes more relevant.  Gross travel propensity can exceed 100 % and often approaches 200 % in some Western European countries where those participating in tourism may take more than one trip away from home per annum

29. 29 Travel propensity  Simply dividing gross travel propensity by net will give the travel frequency in other words, the average number of trips taken by those participating in tourism during the period in question

30. 30 Box 1.1 Calculation of travel propensity and travel frequency Out of population of 10 million inhabitants : 3.0 million inhabitants take one trip of one night or more i.e. 3 x 1 = 3.0 m trips 1.5 million inhabitants take two trips of one night or more i.e. 1.5 x 2 = 3.0 m trips 0.4 million inhabitants take three trips of one night or morei.e. 0.4 x 3 = 1.2 m trips 0.2 million inhabitants take four trips of one night or more i.e. 0.2 x 4 = 0.8 m trips 5.1 million inhabitants take at least one trip 8.0 m trips

31. 31 Net travel propensity = Number of population taking at least one trip Total population x 100 = 5.1 10 x 100 = 51% Gross travel propensity = Number of total trip Total population x 100 = 8 10 x 100 = 80 % Travel frequency = == 1.56 Gross travel propensity Net travel propensity 80% 51%

32. 32  A further refinement to the above calculations is to assess the capability of a country to generate trips.  This involves three stages.  Firstly, the number of trips originating in the country is divided by the total number of trips taken in the world.  This gives an index of the ability of each country to generate travelers. Travel propensity

33. 33 Travel Propensity  Secondly, the population of the country is divided by the total population of the world, thus ranking each country by relative importance in relation to world population.  By dividing the result of the first stage by the result of the country potential generation index (CPGI) is produced.

34. 34 CPGI = CPGI =Where N e : number of trips generated by the country N e : number of trips generated by the country N w : number of trips generated in the world P e : population of the country P w : population of the world  An index of 1.0 indicates an average generation capability.  Countries with an index greater than unity are generating more tourists than expected by their population.  Countries with an index below 1.0 generate fewer trips than average. N e / N w P e / P w

35. 35 Income and price effects  Analysis of tourism demand is hindered by the fact that in practice we normally only see the equilibrium of supply and demand in tourism markets and that change represents a shift from one equilibrium position to another.  Thus we are properly examining tourism consumption rather than tourism demand.  Nevertheless, sufficient market research and comparative studies exist to build reasonably accurate analyses of the effects on tourism demand of independent variables.

36. 36 Effects of Income  The income or stock of monetary assets available to the tourism buyer is a ‘group A’ variable - it relates to all potential buyers of a generating area regardless of their preferred tourism destination.  A great deal of research measuring the effect of income changes on total tourism demand from a generator has been carried out.  The strength of the effect that income change has on demand can be measured by income- elasticity of demand, defined as the following ratio:

37. 37 Effects of Income % change in tourism demand % change in tourism demand Ex =  Ex =  % change in disposable income % change in disposable income between two time periods or two groups of buyers.  It is normal to expect income-elasticity of demand to be positive for most goods and services; the demand for basic goods and services should be income-inelastic (Ey 1).

38. 38  Many empirical studies have been done on income-elasticity of demand for tourism.  In general demand has been found to be relatively income-elastic, if demand is measured by tourism expenditure, but less elastic if the measure is total tourist nights or numbers. Effects of Income

39. 39 Effects of Income  The following figure demonstrates the effect on tourism demand of different income elasticities. If income in a generator rises from Y o to Y 1 expenditure on tourism changes from Q o to each of the different levels Q 1 to Q 5.  The example of a tourism destination whose income elasticity of demand is negative argues that within some markets certain tourism products may be regarded as inferior products.

40. 40  This is difficult to prove empirically without research to isolate changes in demand for a destination from one particular generator or a particular market segment and to monitor those changes with respect to that segment’s income.  Overall tourism demand at that destination may meanwhile be increasing, as other market segments expand.

41. 41 Figure : Income Elasticity of demand for different type of tourism Business Business Income Meeting VFR VFR Holiday Holiday Secondary Vacations Secondary Vacations Y 1 Y 0 0 Q0 Q1 Q2 Q3 Q4 Q5 Demand

42. Policy Implications Knowledge of income elasticity of demand can help tourism managers to determine if their product is a normal good (demand for the product rises as income rises) or an inferior good (demand for the product falls as income rises). Knowledge of income elasticity of demand can help tourism managers to determine if their product is a normal good (demand for the product rises as income rises) or an inferior good (demand for the product falls as income rises). Such information can help tourism managers identify more precisely the potential markets for their products given anticipated changes in income over time. Such information can help tourism managers identify more precisely the potential markets for their products given anticipated changes in income over time. Income elasticity can play an important role in the marketing activities of tourism organisations. Income elasticity can play an important role in the marketing activities of tourism organisations.

43. Policy Implications If per capita or household income is found to be an important determinant of the demand for a particular product, this can affect the location of and nature of sales outlets (eg cheap eats vs gourmet restaurant). If per capita or household income is found to be an important determinant of the demand for a particular product, this can affect the location of and nature of sales outlets (eg cheap eats vs gourmet restaurant). Information on income elasticities is useful in developing marketing strategies for products. Information on income elasticities is useful in developing marketing strategies for products. Thus they can help to identify more precisely potential markets for products (which types of consumers are most likely to purchase the product and in determining the most suitable media for promotional campaigns to reach the targeted audience). Thus they can help to identify more precisely potential markets for products (which types of consumers are most likely to purchase the product and in determining the most suitable media for promotional campaigns to reach the targeted audience).

44. 44 Price Effects The effects of price changes are far more complex in tourism than are effects of changes in income. Two particular price conditions are of note: The effects of price changes are far more complex in tourism than are effects of changes in income. Two particular price conditions are of note:  Although the product element of a tourism package are complementary in terms of characteristics offered, they may well be substitutes in terms of price effects if they are competing for the same slice of tourist spending.

45. 45  Relative prices are important between destinations and generating areas, not just prices at destinations.  In other words, consumer is not simply faced with the set of prices in one geographical market but with the relative prices.

46. 46  In international tourism exchange rate variations are usually the major contributor to relative price differences.  Over recent years, for example, exchange rate variations have made Switzerland and Japan expensive destinations, but most of medditeranean countries are cheap.  However, relatively high inflation may have wiped out these price advantages.

47. 47 Price Effects  As with income changes, the effects of price changes on demand can be measured with elasticities - in this case price - elasticity of demand through the formula: % change in quantity of tourism product demanded % change in quantity of tourism product demanded EP =  EP =  % change in tourism product price % change in tourism product price

48. 48  The standard Law of Demand in economics holds that for most products EP will be negative- that is there is an inverse relationship between a product’s price and the demand for that product.  An EP figure numerically greater than –1 indicates elastic demand and an EP figure numerically less than –1 indicates price in elasticity or relatively unresponsive demand.  Price elasticities are also unlikely to remain constant for any one product, varying between short term and long term and according to the size of price changes. Price Effects

49. 49 Price Effects  The demand for tourism products runs the whole range of possible price elasticities.  In general the greater the degree of competition hence substitutability, amongst products, the higher the price-elasticity of demand is likely to be as price-conscious tourist search for cheaper alternatives.  Once again price elasticities have been found to be higher for recreational tourism than for business or VFR tourism, reflecting the discretionary nature of the one against the obligations of the other.

50. 50 Price Effects  The choice of competitive destinations for vacation tourism appears especially responsive to price change.  Long term (i.e. 6 years) price elasticity of demand for important destinations from major generating countries has been shown to vary from around – 4 for a small cost change (2.5 %) to around –1.5 for a large cost change (40%).  The resulting ‘demand schedule’ for average destination country x is portrayed in the following figure:

51. 51 Figure: Estimated demand responses to holiday price changes to destinations Price A A P 1 P 1 B B P 0 P 0 C P 2 C P 2 Demand Q2Q2Q2Q2 Q1Q1Q1Q1 Q0Q0Q0Q0 D 0

52. 52 Price Effects Two cautions are necessary in interpreting this data. Two cautions are necessary in interpreting this data.  Firstly, tourism demand is here expressed in relative rather than absolute amounts, which may alter values from those found by a ‘normal’ elasticity measure.  Secondly aggregate data may hide the fact that for an individual consumer a small price change may trigger no change at all demand, if that change is considered insignificant or below the perceptual price-change threshold of the consumer.

53. 53 Price Effects  An aggregate analysis also hides the extent to which the prices of individual elements of the tourism product influence overall demand; the cost of carriage is one major variable and that the overall cost of destination items, especially accommodation, is another, but the cost and value to a consumer of particular elements of tourism experience is not always well identified.

54. 54 Price Effects  For specific individual products within tourism the picture is clearer. Demand for budget accommodation and competitive passenger carriage services, for example, has been found to be highly price-elastic. If cross-price elastic is defined as: % change in demand for product A % change in demand for product A E cp =  E cp =  % change in price of product B % change in price of product B  then where A and B are close substitutes we might expect E cp to be positive and may be >1. This is frequently found in, for example:

55. 55 Price Effects  Budget motel or hotel choice in major destinations  Selection of operator for local day excursion  Souvenir purchasing and duty-free shopping  Choice of busline or airline where these compete over the same routes.

56. 56  In these cases the products may be viewed as nearly or completely identical, and E cp values are high.   Some tourists find utility from ‘shopping around’ for best buys as part of their tourism experience, or haggling in bazaars for a souvenir purchase - perhaps the closest a tourist can get to the overt display of an equilibrium market.

57. 57 Price Effects  There may be in tourism cases of products exhibiting the Veblen effect.  This is an abnormal price elasticity of demand where the E p value may be positive over a certain range of prices for a product.  That is demand may actually increase at a higher price.

58. 58 Price Effects  It is argued that wealthy art collectors would not demand a ‘cheap’ masterpiece, because it might not be a masterpiece at all, and because only an expensive work of an art would provide the prestige cachet (seal) which is part of the utility in such a purchase.

59. 59  In the same way, some consumers need to demonstrate wealth and prestige through a demand for luxury tourism products such as the highest priced staterooms on expensive cruiseships, or the most expensive restaurant in which to entertain clients on sales trips.

60. Substitute and complementary goods If goods A and B are substitutes, the quantity demanded of A is directly related to the price of B. If goods A and B are substitutes, the quantity demanded of A is directly related to the price of B. If A and B are complements, the quantity demanded of A is inversely related to the price of B. If A and B are complements, the quantity demanded of A is inversely related to the price of B.

61. Policy Implications Firms need to know how the demand for their products are likely to respond to changes in the prices of other goods and services. Firms need to know how the demand for their products are likely to respond to changes in the prices of other goods and services. eg. if the cross-price elasticity of the demand for a product with respect to the price of a competitor’s product is high, a firm should respond rapidly to a competitor’s price reduction if it is to avoid a loss of its sales. eg. if the cross-price elasticity of the demand for a product with respect to the price of a competitor’s product is high, a firm should respond rapidly to a competitor’s price reduction if it is to avoid a loss of its sales. Information on cross-price elasticity is essential for formulating pricing strategy and analysis of the risks associated with various products, particularly for firms with extensive product lines, where substantial substitute or complementary relations exist among the various products. Information on cross-price elasticity is essential for formulating pricing strategy and analysis of the risks associated with various products, particularly for firms with extensive product lines, where substantial substitute or complementary relations exist among the various products.

62. Policy Implications 62 Cross-price elasticity also allows managers to measure the extent of competition across industries. While a firm might be a dominant supplier of some service within the local tourism industry, a high cross elasticity of demand between the firm’s products and products of firms in another industry indicates that the firm will not be able to raise its prices without losing sales to other firms in other industries.

63. 63 Other special variables in tourism demand There is a number of economic and socio-economic variables rather than prices and incomes which have been noted to have a special influence on the demand for tourism. There is a number of economic and socio-economic variables rather than prices and incomes which have been noted to have a special influence on the demand for tourism. Some of the major ones will be discussed here: Some of the major ones will be discussed here:

64. 64 Fashion  Tourism products, especially destinations are often subject to fashion life - cycles.  Whilst most products exhibit demand life- cycles, in which the opinion leadership of those who first buy them (early adopters) forms fashion-stimulating demand, in tourism it is usually possible to identify exactly the market segments through which trends in demand are passing.

65. 65 Taxation of business expenses  Corporations meet the cost of tourism an expense against corporate income.  Government policy on the extent to which these expenses may be allowed against tax may alter the effective prices of tourism products and hence demand.

66. 66 Taxation of business expenses  For example, suppose that the marginal corporate tax rate is 50 % and government introduces full tax deductibility (decrease) for tourism expenses.  Following Figure shows the effect on demand.

67. 67 Figure: Change in tax deductibility of business tourism expenses Price S 1 S 1 P 1 S 2 P 2 P 2 P t P t D 0 Q 1 Q 2 Quantity

68. 68 Taxation of business expenses  With an initial equilibrium market price of OP 1, businesses are purchasing the quantity OQ 1 of business tourism.  Introduction of full tax deductibility reduces effective prices by the marginal tax rate of 50 %, thus effectively shifting supply from S 1 to S 2.

69. 69 Taxation of business expenses  The ‘tax’ deductible price of business travel falls immediately to P 0, and market movements may produce a new equilibrium at price OP 2 and tourism demand OQ 2  The ‘tax’ deductible price of business travel falls immediately to P 0, and market movements may produce a new equilibrium at price OP 2 and tourism demand OQ 2.  The increase OQ 1 - OQ 2 is possibly rather small because of the inelastic nature of business travel demand.  In practice governments use tax deductibility far more selectively.

70. 70 Negative characteristics of tourism products  In studies of motivation in the workplace, it has been found that while some variables positively motivate employees to work harder, others may merely grievance avoidance or ‘hygiene’ factors,  a pleasant working environment for example, might not take people to work harder, but its absence may cause grievances

71. 71 Negative characteristics of tourism products  Various studies have suggested that a similar situation may exist in tourism demand, that is, some characteristics of tourism products may be positive motivators to their purchase, whilst the absence of others may discourage demand.

72. 72 Time entitlements  In the same way that is possible to calculate the income elasticity of demand for tourism, we can examine the effect of changes in time entitlements such as the number of public holidays, amount of vacation leave and business trip constraints.  Generally such entitlements are increasing worldwide as part of industrialization and automation’s replacement of labor with capital, and with social pushes for more formal leisure time.

73. 73 Time entitlements  However as with income, there are global variations.  In some European countries standard vacation may exceed 28 days in a year, in addition to eight or nine public holidays, but in Japan 10 days’ leave a year is normal.  Where time, and not money, is the effective constraint on tourism demand, any increase in entitlements has a very high positive ‘time elasticity of demand’.

74. 74  Two particular cases are notable:  Extra time allows trips to temporally more remote destinations and tourists are therefore likely to substitute remote destinations for closer ones  Extra time often encourages longer stays in destinations thus increasing spending at the destination.

75. 75 Seasonality  Tourism has one of the most seasonal patterns of demand for any product, with less variation than demand for Christmas cards or air conditioners, but more than nearly all high- value individual purchases.  Several factors contribute to seasonality- principally climate, festivals, and school vacations which all primarily affect recreational tourism.

76. Marketing elasticity of demand Marketing elasticity (E a ) measures the responsiveness of sales to changes in advertising/marketing expenditures. Marketing elasticity (E a ) measures the responsiveness of sales to changes in advertising/marketing expenditures. It is measured by the ratio of the percentage change in sales to a percentage change in adverting expenditures. It is measured by the ratio of the percentage change in sales to a percentage change in adverting expenditures. % change in demand for tourism product % change in demand for tourism product E a =  E a =  % change in advertising expenditure % change in advertising expenditure

77. Policy Implications Knowledge of marketing/advertising elasticity can assist tourism managers to determine appropriate levels of advertising outlays. Knowledge of marketing/advertising elasticity can assist tourism managers to determine appropriate levels of advertising outlays. At the destination level, estimates of marketing elasticities can inform the allocation of marketing expenditure between different tourism products or different market segments. At the destination level, estimates of marketing elasticities can inform the allocation of marketing expenditure between different tourism products or different market segments.

78. Modelling Tourism Demand A large number of research studies have attempted to cast light on what factors actually affect tourism demand, and to what extent. A large number of research studies have attempted to cast light on what factors actually affect tourism demand, and to what extent. Demand functions can be formulated for domestic or international tourism, or for particular tourism market segments, products or services. Demand functions can be formulated for domestic or international tourism, or for particular tourism market segments, products or services. The most common method of estimating demand is regression analysis. The most common method of estimating demand is regression analysis.

79. Model specification  The first step in using regression analysis is to specify the model to be estimated. This involves identifying the most important variables that are considered to affect the demand for the product.  Suppose that our problem is to estimate the demand function for a tourism product (for example, rooms in a four star hotel). The hotel manager might consider the most important variables to include the followings;

80. Model specification  the price of a room (P x )  consumers income (Y)  the number of consumers in the market (N)  the price of boutique hotels (substitute goods, P s )  airfares to the destination, (complementary product, P c )  consumer tastes, (T)  marketing expenditure (A) Q x = f (P x, Y, N, P s, P c, T, A, dummy variables, …)  The dots at the end of eqn refer to any of the determinants of demand that are specific to a product or destination.

81. Measuring demand for international tourism arrivals A model of international tourism demand of the type that is typically estimated and tested can be written as: Q ij = f (Y j, TC ij, RP ij, A i, M i ) Where: Q ij = demand for international travel services by origin j for destination i Y j = income per capita in origin j TC ij = transportation cost between destination i and origin j RP ij = relative prices (that is, the ratio of prices in destination i to prices in origin j and in alternative destinations, adjusted for exchange rate) A i = marketing/promotion expenditure by destination i M i = migration levels in destination i Equation can be written in explicit linear form as Q ij = α 0 +β 1 Y j + β 2 TC ij + β 3 RP ij + β 4 A i + β 5 M i + dummy variables + μ

82. Dependent variables Researchers use a variety of proxies to measure the dependent variable (Q ij ) in a tourism demand function. Researchers use a variety of proxies to measure the dependent variable (Q ij ) in a tourism demand function. These include tourist arrivals and/or departures; tourist expenditures and/or receipts; travel exports and/or imports; tourist length of stay; and the amounts of nights spent at tourist accommodation. These include tourist arrivals and/or departures; tourist expenditures and/or receipts; travel exports and/or imports; tourist length of stay; and the amounts of nights spent at tourist accommodation. The demand can be in total covering all travel motives or the demand from a particular market segment The demand can be in total covering all travel motives or the demand from a particular market segment Typically, demand modellers lag the tourism demand variable on the grounds of habit persistence and risk aversion on the part of visitors, and the presence of supply constraints. Typically, demand modellers lag the tourism demand variable on the grounds of habit persistence and risk aversion on the part of visitors, and the presence of supply constraints.

83. Independent (explanatory) variable: income An increase in real income provides consumers with greater spending power, resulting in the increased discretionary consumption of many types of products including tourism. An increase in real income provides consumers with greater spending power, resulting in the increased discretionary consumption of many types of products including tourism. Wealthy countries and regions with strong currencies are important origin markets for international tourism. Wealthy countries and regions with strong currencies are important origin markets for international tourism. The appropriate income variable is per capita personal disposable income or per capita private consumption expenditure in the origin country (in constant price terms). The appropriate income variable is per capita personal disposable income or per capita private consumption expenditure in the origin country (in constant price terms). Studies show that per capita income is the single most important determinant of demand for international tourism Studies show that per capita income is the single most important determinant of demand for international tourism

84. Independent (explanatory) variable: relative prices In their destination choice decision, tourists will consider the price (cost of living) at the destination relative to the costs of living at the origin and substitute destinations. In their destination choice decision, tourists will consider the price (cost of living) at the destination relative to the costs of living at the origin and substitute destinations. Thus, two types of prices must be considered in the demand function of tourism: Thus, two types of prices must be considered in the demand function of tourism:  relative price between the destination and the source country  relative price between different competing destinations which generates the substitution price effect.

85. Cost of living at the destination relative to the origin The relative price variable which is typically used in the demand for tourism function is the ratio of the consumer price indexes between the host and the origin countries adjusted by the bilateral exchange rate. The relative price variable which is typically used in the demand for tourism function is the ratio of the consumer price indexes between the host and the origin countries adjusted by the bilateral exchange rate. A higher exchange rate in favour of the origin country’s currency can result in a greater flow of outbound tourism to other destinations. A higher exchange rate in favour of the origin country’s currency can result in a greater flow of outbound tourism to other destinations. When the exchange rate-adjusted CPI ratio is used to measure the relative prices of goods and services in the destination, the impacts of inflation and exchange rate movements are measured through one “relative price” variable, referred to as the "real exchange rate" When the exchange rate-adjusted CPI ratio is used to measure the relative prices of goods and services in the destination, the impacts of inflation and exchange rate movements are measured through one “relative price” variable, referred to as the "real exchange rate"

86. Limitations in use of CPI as a relative cost of living measure because the expenditure pattern of a tourist is quite different from that of the average household, the CPIs of the origin country and the destination may not reflect the prices of goods which tourists actually purchase because the expenditure pattern of a tourist is quite different from that of the average household, the CPIs of the origin country and the destination may not reflect the prices of goods which tourists actually purchase trends in general price levels as implied by CPI measures may not necessarily coincide with changes in tourism prices. trends in general price levels as implied by CPI measures may not necessarily coincide with changes in tourism prices. While tourists are reasonably well-informed of changes in exchange rates, information on price levels and price changes in destinations is generally not known in advance While tourists are reasonably well-informed of changes in exchange rates, information on price levels and price changes in destinations is generally not known in advance

87. Cost of living at other destinations  Tourists may consider a range of competing destinations before choosing any particular one. They may compare changes in the cost of living in the choice destination with the cost of living changes in the competing destinations.  Researchers model this consumer thinking in either of two ways:  One way to allow for the substitution between the destination and, separately, a number of possible competing destinations, is by specifying the tourists' cost of living variable in the form of the possible destination value relative to the origin value, therein acknowledging that domestic tourism may be the most important substitute for foreign tourism.

88. Cost of living at other destinations  The other way is to calculate the cost of living at any substitute destination relative to a weighted average cost of living in the different competing destinations, adjusted by the relevant exchange rates.  This approach allows for the impact of price changes in competing foreign destinations and is used more often in empirical studies as fewer variables are incorporated into the model.

89. Transportation costs  Transportation costs refer to the cost of round-trip travel between the origin and the destination  The demand for transportation is a derived demand, namely to purchase destination tourism services.  Unlike for other export goods, the consumer (tourist) must be transported to the product (destination) rather than the reverse.  While estimation of the price of surface travel tends to be straightforward, whether for private vehicle, rental car, coach, train or ferry etc, estimating the cost of air travel can be quite difficult.

90. Transportation costs  Studies show that tourist demand is generally more sensitive to transport prices than to ground prices in a destination and that business travellers are less responsive to changes in transport prices than leisure travellers.  Higher incomes are generally associated with relatively higher demand for air transport.  Consistent with price elasticities, empirical evidence suggests that income elasticities tend to be higher for leisure passengers and lower for business passengers.

91. Marketing and Promotion  The extent to which marketing and promotion expenditure influence tourism demand is difficult to measure.  Data permitting, a useful measure of marketing effectiveness, based on estimated elasticities, is the return on marketing expenditure.  Typically, researchers use the marketing budget of national tourism offices as a proxy. There are, however, great difficulties in modeling the impact of marketing and of separating its effect from the other major influences on tourism demand.  Even if marketing expenditure can be estimated accurately across different origin countries (often difficult to do), marketing expenditure per se does not indicate that the promotion is effective. Different nationalities and cultures are likely to respond differently to marketing and different destinations vary in their ability to use marketing effectively to attract tourists.

92. Migration stock  The choice of destination is also influenced by ethnic and migration factors, which generate tourist flows for purposes of visiting friends and relatives in the various destinations.  There are several possible ways in which immigration can affect tourism.  the greater the number of permanent migrants to a destination, the larger is the pool of friends and relatives in the home country who have an incentive to visit that destination  permanent migrants who visit their former country for VFR purposes may explicitly and implicitly 'promote' the new homeland leading to an increased number of short term visits.

93. Migration stock  an increasing number of migrants to a destination means that there is an increasing stock of accommodation for friends and relatives who visit from overseas.  knowledge that numbers of their compatriots have settled in a country is a contributing factor to a visit to that country.  permanent migrants enrich the local culture and render destinations more interesting and diverse for tourists.  permanent migrants who retain or forge business links with their former country may influence the number of business travellers from their new homeland  The larger the stock of migrants in a destination, the larger the volume of outbound tourism to the former homeland

94. Qualitative factors affecting international tourism demand  Tourists’ demographic attributes which may affect leisure time availability or similar constraints including;  gender, age, education level, employment, profession  Household size (composition of household, and child/children age)  Trip motive or frequency  Destination attractiveness (climate, culture, history, and natural environment)

95. Qualitative factors affecting international tourism demand  Special events (Olympic Games, World Cup, religious festivals, Expo etc)  Political events (terrorism, political unrest, currency crises, grounding aircraft strike, oil crises)  Natural events (tsunami, hurricanes, SARS, Avian Flu, Northern lights) etc. Such factors have varying relevance depending on the specific destination

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