Tourism, Security and Safety From Theory to Practice

Market Simulation
When the war or terror climate worsens, foreign demand for Israeli hotel space
declines. The industry seeks to fill some of these vacancies by turning to the local
market, and one way of doing so is to reduce prices to Israeli guests. Thus, terror
incidents influence tourist activity and prices in both the foreign and local market
sectors. It is useful to ask precisely how prices and sales volumes in each market
are impacted by a terror incident, since this allows us to predict revenue changes
in the two markets and to decompose such changes into price and quantity com-
ponents. Such an analysis also permits us to see whether, or to what extent, the
local market serves as a buffer to international demand swings. For example,
because local demand is inelastic, it may not be desirable for hotels to reduce
prices enough to compensate completely for the foreign demand shortfall.
To simulate a terror event’s impact on equilibrium prices and quantities, we select
a terror index level and set all other exogenous variables—including lagging
prices—at sample means. Using trial values of lagged prices PL
t-1
, PF
t-1
, we com-
pute trial values of the endogenous quantities QL
t
and QF
t
and prices PL
t
and PF
t
.
We then employ the latter to update the lagging prices in the supply functions from
equations (3) and (4) and recompute all four endogenous variables, proceeding in
this fashion until cross-iteration changes in the endogenous variables are small. The
simulation thus represents the asymptotic or equilibrium state of the endogenous
prices and quantities. Our procedure for representing the impact of a terror-related
event on predicted prices and quantities is to compare the price and quantity pre-
dicted in the presence of the terror event with those simulated in a terror-neutral
environment (TER = 0). Differences between predicted and simulated levels are
then linearly regressed against terror intensity and plotted in Figures 3–6.
As can be seen in these figures, both the foreign and local markets are affected
by war and terrorist incidents. In the foreign market, the difference between the
bed night demand quantity predicted at a given peace or terror intensity and that
simulated in a terror-neutral state (Figure 3) falls as terror intensity rises, namely
as one moves from left to right in the figure. A one-unit increase (along the 
−
9 to
+
9 scale) in terror intensity reduces equilibrium foreign demand by 8,521 monthly
bed nights compared to what it would be in a terror-neutral world. The predicted
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bed night price similarly falls relative to the terror-neutral standard. Figure 4 shows
that a two-standard-deviation (four-unit) boost in terror intensity cuts the equilib-
rium price to foreigners by an annual mean of $0.68 per night. On both counts,
hotels’ foreign revenues decline.
Although terror attacks in our model have no direct impact on an Israeli’s
demand for a local hotel stay, they can reduce the hotel rates that Israelis pay, which
in turn would influence Israeli hotel activity. In contrast to the demand-induced
War, Terror, and the Tourism Market in Israel
59
60
40
20
0
−
20
−
40
−
60
−
80
Thousand bed nights per month
−
6
8
6
4
2
0
−
4
−
2
Terror index