Congestion and Coordination Problems in a Tourism Economy

Tourism countries tend to face congestion externalities, which lead to over-production. Transport services produced in the countries of origin and tourism services provided at the destination are highly complementary, so these economies also tend to face coordination failures between firms, which result in under-production. Moreover, the presence of foreign firms poses the question of how much profit is retained by the destination. This paper analyses the joint effects of these problems on the destination's welfare, and the policies implemented to address them. Direct selling and bundling by foreign tour operators emerge as possible market arrangements. Four main results are obtained. First, in the direct selling situation the optimal policy depends on the relative importance of the problems. Second, tour operators always lead to over-production. Third, the presence of a single tour operator is not the solution to congestion. Finally, the switch from several tour operators to a single one is welfare reducing.