Modeling uncertainty in tourism markets

In the recent years the tourism sector has been hit by a number of uncertainty events. This paper studies how uncertainty impacts on the tourism markets and on the destinations price and promotion decisions. We consider a two-stage model with two reference destinations and product differentiation. Specifically, we distinguish between traveling and production costs/inputs uncertainty, and between informative and persuasive advertising. We found that uncertainty tends to increase prices as destinations pass uncertainty to consumers. However, in order to minimize the negative effect of higher prices in their bookings, destinations tend to intensify their promotion efforts. Altogether, uncertainty typically affects more consumers than destinations, which in most cases see their profits increase because of the increase in prices.