Pricing competition and channel coordination with optional tours

What is it about?

This paper consider a tourism supply chain that consists of a tour operator in the source market and a local operator at the destination. The tour product is composed of predesigned tours and optional tours. Consumers are sensitive to the price and the availability of optional tours, represented as the ratio of optional tours. We analyse how the ratio of optional tours to predesigned tours affects each player's equilibrium decisions given three different consumer attitudes towards optional tours.

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Why is it important?

We find that when the channel is coordinated and the ratio of optional tours is sufficiently large, the local operator may reduce commissions. To curb the impacts of lowering commissions, the authors introduce a tax mechanism aimed at optional tours. Numeral examples are provided to illustrate the pricing impacts of optional tours.