A Study of the Positive Impact of Attraction of a Hotel on the Local Economy

Abstract

In a tourist destination, the government which expects the increase of tourists might need to develop abilities to accommodate them. Considering local economy where upper-midscale hotels whose capacities are small relative to a market compete in prices for acquiring customers in an oligopolistic market, we investigate tourism policy such that the government would attract a new hotel. The government would like to make a “feasible” policy in the sense that the attraction never leave the customers or the industry worse off. Focusing on the market where hotels including an entrant are symmetric, we show that there exists a legitimate range of hotels' capacities within which the attraction is feasible. We also explicitly find the range of hotels' capacities. Our result suggests that the government does not necessarily attract a high-class hotel such as a five star hotel (an upscale or luxury hotel) for a positive impact of the attraction. Instead, the government might still enjoy the positive impact by introducing an entrant which is similar to incumbents in terms of capacity size and brand equity without incurring vast amount costs of the attraction of a larger hotel or a high-class hotel.