Travel agency referral and retailer competition

Abstract

Tourists are one of the main market segments for service providers such as parks, museums, restaurants, and retailers. Travel agencies expose tourists in their package tours to service providers for a referral fee. This paper studies the competitive effects of travel agency referral in a setting where differentiated products are sold by two competing service providers. Using a simple spatial competition model, a non-cooperative game is analysed with informed tourists where duopolistic service providers compete on price, focusing on equilibrium prices and the profit of each service provider. This paper shows that referral is beneficial except where the cost of referral is too high. Service providers employ travel agency referral in order to mitigate the intensity of price competition by committing to higher prices.