The smile of the tourist: the relationship between price sensitivity and expenses

Abstract

The objective of this study is to test the effect of individual price sensitivity on holiday expenses. In the context of tourism, in such a markedly heterogeneous market, the great diversity of sensitivities to price leads the role it plays to become especially complex. Analysis of price sensitivity allows the analyst to observe how a tourist reacts when facing different product prices and, on the other hand, understanding the determinant factors of holiday expenses is crucial for organizations and destinations to implement their strategies. The methodology applied estimates random coefficient logit models that consider tourist heterogeneity. The empirical application carried out on a sample of 2127 individuals shows that price sensitivity has a non-linear influence on holiday expenditures, drawing a curious smile-shaped effect. The differentiated effect found for price sensitivities has important implications for management, as it confirms the existence of a great diversity of price sensitivities in the market. Therefore, knowing the individual by individual preference structure in terms of prices allows the pricing of the service to each individual (though extreme, it could be possible), as well as the formation of groups of individuals with similar price preferences. This price discrimination is particularly important in that it is based on the preferences of individual people. The estimation of the individual parameters of the utility function of each individual is crucial for management as it reveals consumers’ preference structure and information on each individual is obtained. At a time when individuals are increasingly demanding and insist on service provision adapted to their specific needs, knowledge of the profile of each consumer allows organizations to offer the most suitable services.