The effects of location and other attributes on the price of products which are place-sensitive in demand

Abstract

There is a particular class of products where people must visit the point of production in order to be consumers, and these products are normally lifestyle, tourism or leisure services. Examples include environmentally-based leisure facilities, housing, and tourist accommodation. Frequently the assertion is made that location makes one product 'superior' to another, in terms of both its production and consumption. This study enquires into the asserted significance of location in product differentiation, with special reference to hospitality and tourism products. The study is particularly concerned with commercially tradeable products offered to a consumer market by a number of competitive firms, rather than being concerned with one-off markets for assets for exclusive use, such as houses. By the use of characteristics theory, this study shows that the role of geographic location within a product such as hotel accommodation is that of a product-differentiating characteristic, or set of characteristics. However, the location of such a product is an example of a fixed, or unalterable, characteristic, once a supplier has entered a market. With most product-differentiating characteristics, a supplier can attain an optimal business position by enhancing the differentiation for as long as customers' willingness to pay 'the extra' (marginal revenue) exceeds or equals the cost (marginal cost) of product enhancement. However, a supplier cannot easily do this for a fixed characteristic. So what is the value of a particular location to a supplier of this type of product? This study develops a model to identify the specific elements of a location that are important to consumers, and then to estimate their values. It is argued that the values of each specific element (locational characteristics) should contribute in a predictable way to the overall price of each product in the market place. It is also shown in this study that individual suppliers who cannot identify, or who incorrectly set, prices based on locational characteristics face a measurable variation in demand from the mean in the market place. The model and methodology are tested empirically in the market for international-standard hotel accommodation on the Gold Coast, Queensland. It is shown that this constitutes a single, coherent market as a tourist destination, where a limited number of producers compete with differentiated products. Those product characteristics that are important to the market are identified, and it is shown that elements of location and other characteristics can be valued accurately across the market. The relationship between suppliers' 'overpricing' or 'underpricing' of their product characteristics and variations in demand from the market average is explored. This study therefore has implications for pricing strategy, as well as for land valuation and planning. The study can be seen as contributing primarily to the economics literature, in the area of industrial economics, but also to the marketing, and hospitality and tourism literature.