The Advanced Econometrics of Tourism Demand

Haiyan Song, Stephen F. Witt, Gang Li

• Publisher: Routledge
• Year: 2008
• Print ISBN: 9780415991209
• eBook ISBN: 9781135852962
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Tourism demand is the foundation on which all tourism-related business decisions ultimately rest. Governments and companies such as airlines, tour operators, hotels, cruise ship lines, and recreation facility providers are interested in the demand for their products by tourists. The success of many businesses depends largely or totally on the state

1 Introduction to Tourism Demand Analysis

1.1 INTRODUCTION

Tourism demand is the foundation on which all tourism-related business decisions ultimately rest. Companies such as airlines, tour operators, hotels, cruise ship lines, and many recreation facility providers and shop owners are interested in the demand for their products by tourists. The success of many businesses depends largely or totally on the state of tourism demand, and ultimate management failure is quite often due to the failure to meet market demand. Because of the key role of demand as a determinant of business profitability, estimates of expected future demand constitute a very important element in all planning activities. It is clear that accurate forecasts of tourism demand are essential for efficient planning by tourism-related businesses, particularly given the perishability of the tourism product. For example, it is impossible for an airline to recoup the potential revenue lost by a flight taking off with empty seats. The loss resulting from these unsold seats contrasts with the case of, say, a car manufacturer, where if a car does not sell on a particular day it can still be sold subsequently.

The tourism forecasting methods examined in this book are advanced econometric approaches. Here, the forecast variable is specifically related to a set of determining forces; future values of the forecast variable are obtained by using forecasts of the determining variables in conjunction with the estimated quantitative relationship between the forecast variable and its determinants.

In section 1.2 the tourism demand function is examined, and measurement issues relating to demand variables are discussed. The functional form of the demand equation and its relationship to demand elasticities are presented in section 1.3, and the chapter is summarised in section 1.4.

1.2 DETERMINANTS OF TOURISM DEMAND

Tourism visits can take place for various reasons: holidays, business trips, visits to friends and relatives (VFR), conferences, pilgrimages and so on. Most empirical studies of tourism demand examine either total tourist trips (including all the above-mentioned purposes) or just holiday trips (Witt and Witt, 1995). Since the majority of tourist visits take place for holiday purposes, the determinants of demand are generally taken to be the same as those for holiday trips in those published studies which examine total trips. We shall therefore also focus on the determinants of the demand for holiday tourism.

The term ‘tourism demand’ may be defined for a particular destination as the quantity of the tourism product (that is, a combination of tourism goods and services) that consumers are willing to purchase during a specified period under a given set of conditions. The time period may be a month, a quarter or a year. The conditions that relate to the quantity of tourism demanded include tourism prices for the destination (tourists’ living costs in the destination and travel costs to the destination), the availability of and tourism prices for competing (substitute) destinations, potential consumers’ incomes, advertising expenditure, tastes of consumers in the origin (generating) countries, and other social, cultural, geographic and political factors.

The demand function for the tourism product in destination i by residents of origin j is given by

Qij = f(Pi, Ps, Yj, Tj, Aij, εij)

(1.1)

where Q_ij is the quantity of the tourism product demanded in destination i by tourists from country j; P_i is the price of tourism for destination i; P_s is the price of tourism for substitute destinations; Y_j is the level of income in origin country j; T_j is consumer tastes in origin country j; A_ij is advertising expenditure on tourism by destination i in origin country j; ε_ij is the disturbance term that captures all other factors which may influence the quantity of the tourism product demanded in destination i by residents of origin country j.

In empirical investigations it can be difficult to find exact measures of the determinants of tourism demand due to lack of data availability. The variables used in empirical studies of tourism demand functions are now reviewed, and the problems associated with these measures are also addressed.

1.2.1 Dependent Variable

International tourism demand is generally measured in terms of the number of tourist visits from an origin country to a destination country, or in terms of tourist expenditure by visitors from the origin country in the destination country. The number of tourist nights spent by residents of the origin in the destination is an alternative tourism demand measure.

International tourism demand data are collected in various ways. Tourist visits are usually recorded by frontier counts (inbound), registration at accommodation establishments (inbound) or sample surveys (inbound and outbound). A problem with frontier counts is that in certain cases a substantial transit traffic element may be present. Accommodation establishment records exclude day-trippers and tourists staying with friends or relatives or in other forms of unregistered accommodation. Sample surveys may be applied at points of entry/exit to returning residents or departing non-residents, or household surveys may be carried out (outbound), but in both cases often the sample size is relatively small. International tourist expenditure data are usually collected by the bank reporting method or sample surveys. The former method is based on the registration by authorised banks and agencies of the buying and selling of foreign currencies by travellers. There are many problems associated with this method of data collection, such as identifying a transaction as a tourism transaction, the non-reporting of relevant transactions and the unreliability of its use for measuring receipts from specific origin countries (the geographic breakdown relates to the denomination of the currency and not the generating country). Sample surveys provide more reliable data on tourist expenditures, but as with visit data the sample size is often relatively small.

1.2.2 Explanatory Variables

Among the various influencing factors on tourism demand, the following are most often considered in tourism demand modelling studies as explanatory variables.

1.2.2.1 Population

The level of foreign tourism from a given origin is expected to depend upon the origin population. Although population features as a separate explanatory variable in some tourism demand studies, more often the effect of population is accommodated by modifying the dependent variable to become international tourism demand per capita. However, in many cases the impact of population changes is ignored. The main justification for not having population as a separate variable is that its presence may cause multicollinearity problems, as population tends to be highly correlated with income (see section 1.2.2.2.) On the other hand, the procedure adopted whereby demand is specified in per capita terms in effect constrains the population elasticity to equal unity (if a power model is under consideration). Although it is theoretically incorrect to exclude population, it is likely that population changes in the generating countries will be small over the short-medium term, and hence the model will only be affected marginally.

1.2.2.2 Income

In tourism demand functions, origin country income or private consumption is generally included as a key explanatory variable, and usually enters the demand function in per capita form (corresponding to the specification of demand in per capita terms). If (mainly) holiday demand or visits to friends and relatives are under consideration then the appropriate form of the variable is personal disposable income or private consumption. However, if attention focuses on business visits (or they form an important part of the total), then a more general income variable (such as national income or GDP) should be used, or a measure of business activity such as aggregate imports/exports between the origin and destination countries.

1.2.2.3 Own Price

The appropriate measure of tourism prices is difficult to obtain. In the case of tourism there are two elements of price: the cost of travel to the destination and the cost of living for tourists in the destination.

Although the theoretical justification for including transport cost as a demand determinant does not appear to be disputed, many empirical studies exclude this variable from the demand function on the grounds of potential multicollinearity problems and lack of data availability. However, it is possible to obtain an approximate measure of transport cost using representative airfares between origin and destination for air travel, and representative petrol costs and/or ferry fares for surface travel.

Usually the consumer price index (CPI) in a destination country is taken to be a proxy for the cost of tourism in that country. The problem of using the CPI as the cost of tourism in the ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of Figures
• List of Tables
• Preface
• 1 Introduction to Tourism Demand Analysis
• 2 Recent Developments in Tourism Demand Analysis
• 3 Traditional Methodology of Tourism Demand Modelling
• 4 General-to-Specific Modellin
• 5 Cointegration
• 6 Error Correction Model
• 7 Vector Autoregression (VAR) and Cointegration
• 8 Time Varying Parameter Modelling
• 9 Panel Data Analysis
• 10 Systems of Demand Equations
• 11 Evaluation of Forecasting Performance
• Notes
• References