Tourism, Security and Safety From Theory to Practice

Conclusions
To our knowledge, this has been the first attempt to formulate a supply and
demand model of a nation’s lodging industry. Focusing on supply as well as
demand is fruitful inasmuch as it provides a view of management’s price responses
Tourism Security and Safety: From Theory to Practice
62
PL (Local Price)
PL
s
= f(QL, QF', . . .)
Local Supply
QL
d
= g(PL, . . .)
Local Demand
PL
s
= f(QL, QF', . . .)
Local Supply
QF' > QF
QT-QF' = Local Capacity
QT-QF = Local Capacity
QL (Local Quantity)
Figure 7
Short-run local supply and demand for Israeli tourism: a schematic view.
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to demand shifts, of which war and terrorism are here given the greatest consider-
ation. In our model, hotels face different costs in hosting foreign guests than they
do in hosting local ones and can charge different rates in the two markets. Foreign
demand is substantially price elastic, but unlike local demand is sensitive to
regional terrorism. Thus, in the presence of violence, hotels seek to compensate for
foreign demand shortfalls by reducing local prices enough to appeal to additional
local tourists. Their success in doing so is constrained by the inelasticity of the
local demand function. Indeed, management has had little success in countering
terrorism’s negative impact on hotel incomes, or on tourist revenue and foreign
exchange.
Nevertheless, we find the terror effect itself to be modest. The empty hotel rooms
and tourist shops popularly supposed to follow a terrorist outbreak do not well
describe the Israeli experience, at least on an annual-average basis. Israeli political
unrest normally is concentrated in urban centers such as Tel Aviv and Jerusalem, and
foreign tourists appear able to some degree to dissociate events there from security
expectations at Eilat, the Dead Sea, and other sites. We should, however, stress that
the revenue impacts summarized in Table 4 and elsewhere in this chapter are annual
means of monthly estimates, which may fluctuate widely in a given year. In addition,
hotels are unable to eliminate many costs in the short run, so the revenue shortfalls
indicated represent much larger proportionate changes in profit.
That hotels may charge different rates to foreign guests than to domestic guests
suggests they may also price discriminate between the two markets, permitting
them to boost revenues above the competitive norm. Strategic behavior of this sort
requires inter-firm collusion. If hotels do price strategically, a price discrimination
model might be a better vehicle for assessing the impacts of political unrest than
is the present supply-and-demand approach, in which prices are cost-based. With
that in mind, we tested a model in which foreign and local bed night prices are cho-
sen to equate marginal revenues in the two markets. Statistical fits were poor and
simulated prices and quantities diverged far from the actual values. Evidently, the
collusion necessary for discriminatory pricing is not present in Israel, and a com-
petitive model is a more accurate basis for the analysis of hotel behavior.
Note
1
This chapter was previously published as: Fleischer, A., and Buccola, S. (2002). War,
terror and tourism market in Israel. 
Applied Economics,
34(11), 1335–1343.