Investment in Tourism Market and Reputation

Recent contributions in tourism economics acknowledge that the tourism market is imperfectly competitive and, as such, should be studied from an industrial organization perspective. This approach seems especially relevant to shed lights on one issue of importance for tourism destinations: how to achieve sustainable tourism development? Indeed, it has long been empirically observed that tourism development follows a life cycle. After a period of growth, the development of touristic (mountain and seaside) resorts usually stagnate and decline. At least part of the explanation for this pattern is to be found in the evolution of destinations' reputation over time. The present paper investigates the incentives for adjacent tourist resorts to invest in quality in order to maintain their collective reputation. We propose a dynamic model where (1) several adjacent tourist resorts select their tourist flows and (2) invest in order to remedy to the detrimental effects tourism flows have on local environmental amenities. The overall tourist presence and the sum of investments made by tourist resorts jointly define the quality of the touristic product offered by this tourism destination. We assume that this quality cannot be observed by consumers at the time of purchase. However, in this situation of imperfect information, consumers form expectations about the quality of the touristic product offered at any point of time. These expectations define the collective reputation of tourist resorts, determine the position of the tourist resorts' demand curve and constitute the state variable in the differential game. We characterize and compare equilibrium strategies under a noncooperative and investments coordination regimes.