Sustaining quality in tourism destinations: an economic model with an application

Abstract

Sustaining quality in tourism destinations can be described as seeking to maintain a destination's reputation. This is a strategy that has a dynamic dimension in the sense that the benefits from such a strategy are likely to accrue in the future. The task of building reputation will necessitate some investment which implies that, in equilibrium, a high quality tourism experience will sell for a premium above its cost of production. This premium can be seen as the return on the initial investment in reputation, or as an important incentive in inducing a destination to maintain its reputation as a particular kind of quality destination. Without such a premium a destination may find that a fly-by-night strategy of quality reduction would be profit maximizing. This is the type of moral hazard problem that is present when, say, a tourism destination faces the question of how to react to increases in tourist numbers. With large numbers reputation may not be seen as important and the various providers have a strong incentive to cut quality, as long as it is costly to produce quality, to the lowest level. If there is a premium provided to maintain quality this problem can, however, be overcome and quality can be sustained. This problem is modelled and illustrated for tourism to a small island off the west coast of Ireland.