An economic model for tourism destinations: product sophistication and price coordination

The paper models the optimal development strategy of a tourism destination by identifying and analyzing two key economic features: i) the long-term choice of whether to invest in the enhancing of natural and/or cultural resources (which act as common goods in the destination) or to increase the degree of sophistication of the tourism product (here intended as the variety of complementary services to accommodation that are demanded by tourists): ii) the short-term choice of whether or not to implement price coordination among local firms, a problem stemming from the anticommon nature of the tourism product. We build a two-stage model for the tourism destination, thus identifying the optimal degree of sophistication of the tourism product and the optimal institutional arrangement in terms of coordination. This approach helps shed light on the rationale underlying the development path taken by different destinations, thus overcoming some of the limits of existing literature and providing a simple taxonomy for the observed diversity of real-world destinations. Accordingly, we provide a classification of destinations based on the type of coordination and on whether the primary resource is natural, cultural or organizational.