Market Structure of the German and British Tour
The Baldric Islands could be one of the regions that best symbolizes the Mediterranean sun and beach holidays. This type of tourism emerged in the ass’s and supposed a turning point in the evolution of tourism.
Before this date few tourist visited the islands and all of them were of the upper class, after 1960 the middle and lower class can afford vacations due to several economical and cultural changes. One f the most Important changes was the package tour made by tour operators, who due to the volume and standardization of the packages generated economies of scale, and so, lower prices to tourist who become to arrive In mass. European consumers showed a growing tendency to this type of vacation, partly due to lower prices that, for the same final product, could offer tour operators (Travel and Tourism Intelligence, 2000).
This lower price is the result of a bulk negotiation with the different elements that compose the package tour, essentially: hoteliers and airlines. European tour operators are vertically integrated with charter airlines. The lack of studies on hoteliers-tour operators’ price negotiation is due to the non-availability of data related to this theme. So, although we consider that empirical evidence is necessary,
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The results of these interviews highlight that operators who contract more room’s beds are those who get lower prices. Obviously, those operators are the large ones. So, we can start from the premise that large tour operators have market power on mass destinations. The main repose of this paper is to study prices that tour operators fix on the package tour brochures in order to determine if they operate in a competitive or oligopolies market.
If in the origin market operates under perfect competition, tour operators could fix a marginal-cost price, on the other hand, they could fix a price above the marginal-cost without losing market share if the origin market is oligopolies. Anyway;ay, the existence of economies of scale in sales, marketing and purchasing, mean that there are conditions, which strongly favor concentration in the tour operator industry (Williams, 1996).
Both German and British tour operators dominated the European market in 1999, as seven of the ten main tour operators are of these nationalities (UP”‘ EuropeГcache Vertebrates in Azalea, documentation 1999/2000). Moreover, in each country large tour operators have large market shares: in 1999 the seven large German tour operators have a 83% market share (FEW), whilst the four main British tour operators control the 86. 6% of the Spanish market (AC Nielsen).
On the other hand, the Baldrics attract large numbers of German and British tourist, accounting for 70% of the total of foreign tourists in 2000[ii] and as exposes Williams (1996) the destinations that are dependent on the British and German markets are in fact locked into relationships with the powerful tour operators in these countries. The first propose (hypothesis 1) of this paper is to contrast the market power of these companies when selling the Baldric Islands.
By the way, the hotel chains in the Baldric Islands, as an association of hotels, can negotiate lower prices with tour operators than an individual hotel, and thus, can offset the power of tour operators in the Islands. This is the last point (hypothesis 2) that we want to analyses in the paper. Dunning and Macaque (1982) argued that there are three conditions for the emergence of international hotel chains: 1) where there are net ownership advantages; 2) where there are location endowments; 3) to internalize market transactions.
In mass tourism the authors argued that the first two conditions do not exist, as the tourism product being sold is largely indifferent to branding and location factor endowment. We do not thing that mass tourism and hotel chains may not be held concurrently, as most Baldric hotels chains have internationalist and some of them are between the most important in the world. Resuming, in this paper we will examine the German and British tour operators’ industry through the analysis of the package tour prices on the Baldric Islands and the roll that hotel chains play.
The evidence that price could give is not enough, but a gut approach to analyses the tour operators’ package tour industry. The paper is divided as follows: in the next section, we first review the literature concern to tour operators, then we describe the data used in the paper. After that, we show some some relevant characteristics of the package tour on its price. Then, an analysis of arrange is done to evaluate the statistical significance of the variables detected as significant in determining the price of package tours; and finally some observations on the package tour industry are offered before reaching an overall conclusion.
LITERATURE REVIEW There are implicit statements between those who work on the tourism sector, that tour operators dominate mass destination markets and although there are numerous assertions of the importance of tour operators, there has been little detailed research on this topic. We thought that the package tour industry analysis is still at its singings, despite its relevance in most of the European markets. Several researchers have discussed the structure of this industry, but the conclusions in some cases have turned out to be contradictory.
Sheldon (1986) argues that the US package tour industry is pollarded into a few large stable firms and many small less stable firms, and conclude that the industry is contestable. Fitch (1987) presents descriptive evidence of market power in the I-J package tour industry. Bam and Muhammad (1994) argue that the I-J package tour industry is oligopolies and prone to price instability. Taylor (1996) queries whether the I-J industry is contestable or oligopolies and concludes that the UK market is contestable.
Curtain and Busby (1999) expose that due to economies of scale, tour operators have enormous buying power (monopoly) as well as considerable control of the distribution and sale of their product in the market place (monopoly power). The above papers are based in theoretical arguments. Evans and Stables (1995) use descriptive statistics to argue that the UK industry is segmented according to strategic groupings, where the large firms are oligopolies and the small ones are competitive.
Grafton and Richards (1997) introduce some empirical evidence on package tour prices and tour operators’ market shares. They conclude that the I-J package tour industry is contestable, whilst the German is a stable oligopoly. Davies and Downward (1998, 2000) use econometrics, and the results gave empirical support to the Evans and Stables thesis of strategic groupings. Concretely, they argue that the I-J package tour industry is segmented by size.
On the other hand, there are some papers that study the tour operators’ industry in destination places rather than in the origin markets: Taylor 1995) analyses the package tour price competitiveness in several Mediterranean destinations and concludes that the Spanish hotels are price acceptant, and emphasizes the high tour operators’ negotiation power. Sinclair et al. (1990) examine the package tour prices in Amalgam and conclude that there are significant differences in prices between I-J tour operators. GullГ¶ et al. 2001) study the German package tour prices in Majorca and come to the conclusion that there are significant differences in prices, no related with the package tour characteristics. Furthermore, u to the intimidation legislation, some concentrations between tour operators have been analyses by The Monopolies and Mergers Commission (the British authority on mergers and concentrations) and the European Commission (the Mergers Commission investigated the acquisition of Horizon Travel by Thomson Travel Group and reported that the British tour operators’ market was competitive.
They demonstrated that with the followings facts: the price competitiveness of the market, low profitability, relatively easy entry by new firm to the tour operating industry and higher prices in Germany and other European countries. On the other hand, in 1999 the European Commission investigated and blocked the acquisition of First Choice by Riotous alluding to several features that indicated a dominant position on the British tour operators’ market.
By the way, other acquisitions between tour operators of different nationalities investigated by the European Commission have been expected not to operate against the competition (Riotous/Frosh Tourist and TU/Thomson). At this point, we consider that the European Commission do not investigated the market power that this macro European tour operators can have in a early future on some destinations, as the Baldric Islands, where almost 20% of the tourist are carried by Thomson and TU’, nowadays belonging to the same tourist group.
THE DATA The data used in this paper is from 28 German and 20 British tour operators’ summer 2000 brochures[iii]. The brochures describe in detail the characteristics of each offer (hotel category, proximity to beaches, swimming pool, etc) and give an overall price, not giving a price to each element of the offer. Many of the characteristics described in the brochures are related to the hotel star rating[iv], regulated by law. However it should be stress that the star rating don’t constitute an exhaustive description of the hotel, so there are other characteristics that impinge on package tour prices.
Concretely, we consider: zone, hotel star rating, beds in room, type of board, proximity to a population centre, picturesque surroundings, lift, child care, playground, air condition, TV, SAT, garden, entertainment, no smoking areas, swimming pool, tennis, bicycles, sports, sauna, gym, golf, room sea view, mini bar, proximity to a natural area, proximity to beaches, total rooms and floors of the hotel ND exclusive to the tour operator.
Tour operators’ package tour prices for the same hotel vary depending on the specific characteristic of the offer (beds in room, type of board, zone, etc) and of other facts, concretely transport cost, length and time of the year. As in GullГ¶ et al. (2001) we consider, from the point of view of price competitiveness, the influence on prices of product’s characteristics rather than transport cost and time of year for the present analysis.
Thus, the present analysis focuses on offers for a stay in one-to five-star hotels in the Baldric Islands, engendering only prices for the first week of August 2000 (high season) and with departure from D;selfless and Catwalk. The high season was chosen because that time of the year (May-October) is when more tourists visit the Baldric Islands. Nearly the 50% of the tourist that visit the Islands concentrate in the months of June, July and August[v]. The selection of the first week of August was arbitrary. The choice of D;selfless was based on the fact that it moves 20. % of the German tourist that it candles 29. 9% of British tourist[vi]. Comparisons between nationalities are erasable because a charter flight’s mean price from Catwalk or from D;selfless to the Baldric Islands do not present significant differences. We really thought that our data is suitable to analyses the tour operators’ price structure in the Baldric Island. Our previous statement is based in the fact that 8921 tour operators’ offers associated with 693 hotels were analyses, while 713 hotels is the official number of registered hotels in the Baldric Islands.
Furthermore, the fact that nearly 90% of hotel rooms are contracted by tour operators in the Baldric Islands allow us the inference of the results to the industry. ANALYSIS OF THE PACKAGE TOUR PRICES Our first hypothesis to contrast is if there are differences in price due to tour operators and thus, not associated with the characteristics of the offer. The second hypothesis is to analyses the role that hotel chains play in the determination of package tour prices .
We first realize a descriptive analysis, to carry on with an analysis of variance. Thus, allow us to isolate the effect that tour operators and hotel chains have on prices, estimating if there are differences and the kind of differences. Descriptive analysis Tour operators The variability of the prices of the packages offered are due to several factors, some of them associated to the characteristics of the offer and some related to the tour operator that organize the package tour.
To analyses our first hypothesis we have to isolate the tour operator effect by honeymooning the offer. We can only compare prices between tour operators if the offers are homogeneous. Hotel star rating, type of board and beds in room are expected to be, in a first approximation, the main causes of price variability. So, the offers that we consider are in a double room with half board in a three stars hotel. Figure 1 and 2 present the box-plots of the price in this market segment for each tour operator for each nationality[vii].
In figure 1, it can be seen that, Nag Reign’s, Fat’s and Club Blades Mere’s median price is in a range clear above the rest, while SSL and Г¶gear Tours, and TU and C&N present similar distributions. Insert Figure 1 about here In the case of British tour operators, figure 2 shows that the positions of the price distributions have a clear order: Riotous’ price distribution is above the rest, then go Thomas Cook and Virgin and finally, Cosmos, First Choice and Thomson are third in the ranking.
Insert Figure 2 about here A careful reading of this information allows the inference of factors other than hotel star rating, type of board and number of beds in a room in price determination. Although other factors determining price are considered in the analysis of variance, these results point to a differential effect associated with the tour operator. Once we have highlighted the differentiation effect of tour operators, we carry on with its analysis.
We don’t have to forget that tour operators are intermediaries between the zone or in a demand segment could be reflected both in hotels, through a low price agitation, and with customs, offering higher prices in the brochures. The first one, regrettably, can be estimated trough the data, but we can explain the possibilities that tour operators have when they establish the package tour price. If they have market power in destinations (we assume that large ones have) will obtain lower prices per room. At this point, in general terms, tour operators have two alternatives.
First, they can establish lower prices in the brochures, so its mark-up will not benefit, but consumers; on the other hand, tour operators can raise mark-up and get beneficial. The first choice will show market power with respect to hoteliers, whilst the second will state market power with respect to hoteliers and clients. To focus on its control capacity and its influence on prices, we have created a new variable: product concentration degree that measures the importance of each tour operators’ offer by nationalities in each market segment, according to star rating and type of board.
It has been calculated as the percentage of the number of offers that each tour operator realize in each hotel star rating and in a specific type of board, regarding the total number of offers in this segment. A 10. 9% value for this variable to Anchorman’s three stars hotel and half board offers, mean that the 10. 9% of the package tour’s offers in three stars hotels and half board are realize by this tour operator. A dispersion graph between this variable and the mean price by hotel star rating and type of board are shown in figure 3 for British tour operators and in figure 4 for German.
Insert Figure 3 about here The dispersion graph shows a positive relation between Product concentration degree and the average price by star rating and type of board of British tour operators’ offers. The Pearson coefficient (0. 84) confirms that the relation is significant and positive. Insert Figure 4 about here The same results are obtained with German tour operators, with a Pearson coefficient of 0. 293, but although the coefficient is signification and positive, the general picture is not so clear.
So, the general conclusion for both nationalities is that as the Product concentration degree increases the average price by star rating and type of board is higher. Our first preliminary conclusions of this descriptive analysis of tour operators are two: 1) There are differences in price among international companies. ) As the control of a market segment by a tour operator increases, it can fix higher prices. Hotel chains The association of hotels in chains is seen, among other factors, as an intention to offset the European tour operators’ growing market power (Barreled, 1990, p. 228; Addax, 1988).
Regarding to hotels chains and its capacity to offset the tour operators’ market power, we have created a dummy variable with further information called agreement with Toto which takes three categories: 1) the hotel doesn’t belong to a hotel chain, 2) the hotel belongs to a hotel chain and it have some kind of agreement tit tour operators and 3) the hotel belongs to a hotel chain and it have any agreement with tour operators. Once we have obtained the dummy, we have calculated the mean difference between each category for offers in a double room with half board in a three stars hotels.