What Do Tour Operators Do? Internet and the Economics of Intermediation in the Tourism Industry

Abstract

In this paper we discuss the present and future role of tour operators (and intermediation in general) after the advent of internet and other information and communication technologies (ICTs). We adopt the transaction costs economics framework so as to be able to analyse the role that tour operators play in the tourist vertical chain, and the impact that internet will likely have on its role as intermediaries. In the traditional (pre-internet) framework, tour operators diminish transaction costs by: (i) facilitating tight coordination among the several components of the package tour; (ii) reducing search costs of potential tourists; and (iii) by providing credible information on the true quality of the tourist product. The advent of internet has reduced the need for intermediation by a TO because internet facilitates direct coordination by potential tourists themselves, and reduces their searching costs. However, to our view, the need for intermediation by a TO still remains because quality uncertainty between buyers and sellers is still an issue in the era of internet. Thus, the main role of a TO lies in providing credible information on the quality of the tourist product to the potential tourist. The TO can do so by means of building a reputation and a brand name for providing good quality packages.