Quality Externalities among Hotel Establishments: What is the Impact of Tour Operators?

Abstract

This paper is about quality decisions in a vertical structure, in which competitive producers sell to ‘powerful retailers’. Specifically, the analysis focuses on the role played by the tour operator (TO) in quality investments when distributing the capacity of a given tourism destination. The authors emphasize the presence of quality externalities among hotel establishments, and find that TO distribution can sometimes provide a solution to the ‘tragedy of the commons’ in quality provision. Thus they assess the implications of vertical relationships for quality in the hotel industry and derive appropriate policy recommendations.