TOUR1004

Economics for
Tourism, Hospitality &
Events

Week 6
Market Structure &
Strategies

Dr Ya-Yen Sun
UQ Business School
Contents of this week teaching

1. Market Structure – 4 types of markets

2. Strategies
 The four market structures
Characteristic 1.Perfect 2. 3. Oligopoly 4. Monopoly
competition Monopolistic
competition

a. Number of Many Many Few One

firms
b. Type of Identical Differentiated Identical or Unique
product differentiated
c. Ease of entry Very high High Low Entry blocked
(Entry barrier) (none) (low) (high) (very high)
Examples of Wheat Restaurants Airlines Tap water
industries Apples Souvenir shops Car rentals Viagra
Regular hotels Theme parks
5-star hotels

Control over Price takers Price shaper Price shaper Price makers
price
Oligopoly – price shapers
Ø A small number of firms dominate supply in the market;
Ø There are strong barriers to the entry or exit of firms.
Ø Tourism oligopolies generally operate under strong product
differentiation

Ø Examples of oligopolistic tourism related markets: airlines on

particular routes; cruise; theme parks; five star hotels or tour operators
in central locations
Oligopoly tourism firms
They tend to compete
on
• Advertising
• Free gifts and offers
• Quality of service or
value added
• Follow-the-leader-
pricing

Qatar Airways is named the World’s Best Airline at the 2021 World Airline Awards, with
Singapore Airlines ranked 2nd and ANA in 3rd place.
Monopolistic competition – price shapers
Ø A very large number of buyers and sellers in the market, selling
similar but differentiated products;
Ø Because of slight product differentiation, firms have partial control
over the prices that they charge;
Ø There are minimal barriers to the entry or exit of firms.

Examples of monopolistic competition tourism firms – restaurants,

souvenir shops, Airbnb
Assume you are the CEO of a
local tourism-related company,
what strategies will you company size
employ to strength your
organization competitiveness?
product
Can you name two?
pricing

cost
Strategic approaches for tourism
firms
1. Expansion & Integration (size)
2. Alliances (size)
3. Product differentiation
4. Cost leadership
5. Strategic pricing
1. Expansion of firms
Growth – take advantage of economies of scale
§ Just getting bigger
§ Horizontal integration
§ Vertical integration
§ Diversification to another industry
Horizontal and Vertical integration

Dwyer et al 2010
Hilton Worldwide – horizontal integration

• (Luxury) Waldorf Astoria Hotels and Resorts, Conrad Hotels & Resorts,
• (Full Service) Hilton Hotels & Resorts, DoubleTree by Hilton, Embassy Suites Hotels,
• (Select service) Hilton Garden Inn, Hampton Inn and Hampton Inn & Suites,
• (Extended stay suites) Homewood Suites by Hilton, Home2 Suites by Hilton and
• (Timeshare) Hilton Grand Vacations.
Thomas Cook Travel – vertical
integration
Founded by Thomas Cook in 1845. Holiday bookings and integrated
travel services.

Holiday Insurance From Thomas Cook

‘Thomas Cook offers affordable car hire for all customers.’

2. Strategic alliances

Strategic alliances are agreements, partnerships, or

joint ventures set up for a specific, limited purpose
between otherwise competitive firms.

q Alliance can be formed within any tourism market but are

especially prevalent within the airline industry (Star Alliance,
OneWorld, and Sky Team).
q http://www.staralliance.com/en/

q Alliances can be formed between different but complementary

products. Examples: airlines, hotels and car rental firms.
https://www.flickr.com/photos/pictoquotes/23555254519
3. Product differentiation

Product differentiation can:

Ø create market power (charge price > MC)
Ø reduce price elasticity of demand (make your customers less
sensitive to price increases)
Ø create repeat business, especially when allied with branding,
through customer loyalty
Ø create effective barriers to entry and lead to higher price
Ø provide a basis for price discrimination.

Innovation can be manifested in a new product

design, a new production process, a new
marketing approach, or a new way of
conducting training. (A video of Marriot Hotel)
Bubble Tea from Taiwan

Milk tea with

tapioca pearls
4. Cost leadership

q Achieving the lowest production costs relative to competitors. It is a

valuable strategy when tourism markets are sensitive to changes
in price.
q It is common among tourism operators and low cost carriers as
they compete for market share.
q Low cost can serve also as an effective barrier to entry.

q Cost leadership can be achieved by:

Ø using cheaper inputs;
Ø producing a core product (with no frills);
Ø achieving economies of scale by high volume sales.
Long Run Costs in Tourism
• Think of budget airlines, what do you think has led to these airlines
being able to charge lower prices? Please watch the video first
and write down some observations.
https://www.youtube.com/watch?v=TqgEB4U47bA

– Use new efficient aircraft, often a single type – less fixed costs, less fuel costs
– Fuel hedging – buy fuel when prices are low
– No frills service – lower input costs, less staff
– Good IT for booking systems – technology lowering costs and improving
utilisation
– Use lower cost secondary airports
5. Strategic Pricing
Firms in other than a perfectly competitive market will have
some ability to set prices and will employ a pricing strategy

q Price is the most adjustable of all the firm’s decision variables.

q Price triggers buyer perception as to the quality of the tourism

product and its positioning within its market segment, either
attracting potential buyers or deterring them.

q Price can be altered quickly, for example, airline adopts yield

management which sets prices on a daily or even hourly basis.
Marginal pricing

q Under marginal pricing, the tourism firm will set price under the
profit maximisation rule, corresponding to the output where
marginal revenue (MR) equals marginal cost (MC).

q The more common forms of marginal pricing include:

5.1 price discrimination;
5.2 two-part tariffs;
5.3 peak load pricing;
5.4 bundling;
5.1 Price discrimination
Charging different prices to different buyers for the
same or similar products, based on their different
willingness to pay. Quite common within tourism.

Requirements:
1. Sellers have some price setting power
2. Sellers are able to identify two or more groups that are willing
to pay different prices. Each group has a different price
elasticity of demand.
3. Sellers are able to keep the buyers in one group from reselling
the good to another group. Firms attempt to prevent this by
separating markets by geography, time or income.
Airfare
Please check the price for

• Trip: Tokyo (NRT) → Paris (PAR)

• Date: Nov 20 → Nov 23
• Economy class
• Air France

q One price or multiple price is better for Air France?

q One price or multiple price is better for customers?
 The extra “bite” of revenue
cuts into consumers’ surplus.

Extra
revenue

Revenue
Extra
revenue
Third degree price
discrimination
• Firms are able to discriminate based on different groups
of consumers having different elasticities of demand
• Most prevalent form in tourism
• Firms set price to make a profit from each group
depending on elasticities
5.2 Two part tariff
• With two part tariff pricing firms charge customers
both an upfront (entry) fee and an ongoing user
(usage) fee, hopefully increasing overall profits.

• Examples: Amusement parks which charge both an

admission fee into the grounds and then a separate
charge for each ride or activity.
• Firms try to cover their MC through
the entry fee and then capture extra
consumers surplus through the
ongoing fee
5.3 Peak load pricing
The Peak Load Pricing is the pricing strategy wherein the
high price is charged for the goods and services during
times when their demand is at peak.
Stradbroke Ferry

https://www.stradbrokeferries.com.au/transport/search
5.4 Bundling
• Combine two or more products for one price
• Appeals to consumer for convenience
• Contributes to product differentiation
• Examples, inclusive tours, McDonalds (you want fries with
that?)