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Variety-seeking Behavior and Pricing Strategy in Tourism Industry
Variety-seeking Behavior and Pricing Strategy in Tourism Industry
YAO-HSIEN LEE
Department of Finance, Chung Hua University, Taiwan
HUI-CHUN CHEN
Institute of management of Technology, Chung Hua University, Taiwan
Department of Accounting Information, Hsing Wu College, Taiwan
TSUNG-CHIEH YANG
Institute of management of Technology, Chung Hua University, Taiwan
Abstract
This study applies two-stage game to discuss how a firm prices its two different activities (H and L) under consumers’ variety-seeking behavior in the tourism industry. There are two different kinds of consumers, H & L, whose preferences are diversified. Two different pricing strategies, the single price strategy and the different prices strategy, were analyzed and the results were discussed as well. The concept of the subgame-perfect Nash equilibrium is applied to solve the two-stage game. Finally, the comparative-static analysis is utilized to discuss the prices, the population of customers and the profits of the firm under two different strategies.
Key words: Variety-seeking, Two-stage game, Tourism Industry, Subgame-perfect Nash Equilibrium
Variety-seeking Behavior and Pricing Strategy in Tourism Industry
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Variety-seeking Behavior and Pricing Strategy in Tourism Industry
1. Introduction
Consumers seem to persist in seeking variety among hedonic products such as food, music, video games or leisure activities. Ratner, Kahn and Kahaneman (1999) showed that individuals choose some less-enjoyable experiences because they compare their favorite experiences to those less-pleasant experiences so as to obtain some satisfaction. Further, they pointed out consumers intend to have different pleasant experiences if they evaluate their experiences in overall preference sequence. In the other words, consumers will choose less-preferred experiences just to obtain diversified experiences. As for what kind of benefits do consumers obtain from variety-seeking behavior? They concluded that there are two different benefits from variety-seeking behavior. First, consumers intentionally sacrifice enjoyment now for better memories latter. Second, consumers may choose variety because they believe that they will be considered fun-loving people if they do so. Therefore, individuals utilize variety-seeking behavior strategically to gain more memorable experiences and to be seen as a fun person. Similar explanations are also found in studies of Elster and Loewenstein (1992), Huber et al (1997), and Ratner and Kahn (1998). Furthermore, Kahn, Ratner and Kahameman (1997) provided two explanations to describe consumers’ variety-seeking behavior. They argued that consumers try to create the best memory of the entire sequence of choices. And the choices include diversified experience sequences instead of only comprise the most favorite experiences. They also point out that consumers need contrasted hedonic experiences to maximize their pleasure. The enjoyment of a favorite alternative may occur when it is compared to a less preferred alternative. That is, in order to experience pleasure some type of pain may be necessary.
All the researchers above mentioned that consumers’ variety-seeking behavior happens in their tourism (or leisure) experiences. However, the leisure management or tourism economics researchers such as Sinclair and Stabler (1997), Torkildsen (1999), Cooper and Wanhill (1997), Crossley and Jemieson (1998), Hall and Lew (1998), Ryan and Page (2000), and Fyall, Garrod and Leask (2003) didn’t discuss the influence of variety-seeking behavior upon tour experiences, the tourism management strategies and the consumers’ leisure choices. But Kemperman et al (2000) did find that the variety-seeking behavior has influence on the consumers’ choice of theme park in Netherlands. Variety-seeking behavior is a relatively recent topic in marketing; however, it has pretty long tradition in the psychology literature. Early in 1954, Berlyne discussed the human behavior of seeking novelty from psychology view. He indicated that the utilities of repeated using same brand will decrease eventually. The researches, such as McAlister (1982), Givon (1984),Lattin and McAlister (1985),Kahn, Kalwani and Morrison (1986), Bawa (1990),Kahn and Louie (1990),as well as Feinberg, Kahn and McAlister (1992) focused on the applications of marketing and the influences on management while consumer variety-seeking behavior occurs. And Peter and Olson (1999) discussed the consumer behavior and product strategy in which variety-seeking and brand loyalty was concerned.
There are a few articles directly discussed variety-seeking behavior in Taiwan. But there are lots of researches tried to find out the tendency and influence for an individual to consume variedly using surveys; and they separated the market by using statistic analysis. The studies concerned tourist consumption behavior and tourism strategies from the view of consumer decision making process are cited as follow. Jou and Wu (2002) analyzed how the tourist motivation and the attributes of destinations affect the leisure farm tourists’ choice. Cheng and Lio (2001, 2003) studied the Taiwanese vacation lifestyle and the vacation preference of consumers. They found out there are significant connections between consumer vacation lifestyle and touristic consumption behavior.[1]
Therefore, to price the different products properly and strategically becomes a very important revenue management issue for a firm in tourism industry facing consumers with variety-seeking behaviors. This study applied the two-stage game to discuss how a firm prices its two different activities in the tourism industry, and how the variety-seeking behavior affects the firm’s pricing strategy. We analyzed two different pricing strategies, the single price and the different prices, and further compare results with two strategies.
2. Single Pricing
2.1 Firm
When tourists go for leisure activities, they usually arrange their first two prior activities. Therefore, we assume that there is a firm which provides only two different leisure activities, such as theme parks, resort, or vacation hotels. The activities are divided based on their demand on consumer’s physical strength into higher energy consume activities (H type) and Lower energy consume activities (L type). Following the Hotelling model, H type activity and L type activity are located at the two endpoint of [0, 1]. The firm charges tourists a single price, P, for the different activities. The average costs to provide two activities are CH and CL. For generalization, we set CH = C and CL = 0. We also assume the capacities of both activities are able to fulfill all the consumers’ needs. That is, the crowded costs do not have any influence on the price of a firm or the utilities of consumers.
2.2 Tourist
Depends on tourists’ life styles, we separate tourists into two categories, H type and L type, as mentioned above. The total population of type H and type L tourists is 1, and distributes evenly in [0, 1]. Therefore, tourists of both types use χ (0<χ<1) to measure the degree of disutility (dissatisfied costs) of choosing activity H. And correspondingly (1-χ) is used to measure the degree of disutility (dissatisfied costs) of choosing activity L. So, χ is a Hottelling index of horizontal differentiation. Thus, the utilities of a tourist with χ disutility costs facing two type activities can be shown as below.
(1)
(2)
In (1) and (2), we denote parameters α>0 and β>0 as the basic values (or ideal values) of tourist H choosing activity H and activity L, where α ≧ β > 0. That is, to tourist H, choosing a preferred activity should have higher basic value. Similarly, parameters γ>0 and θ>0 indicate the basic value of tourists L choosing activity L and activity H, where γ ≧ θ >0 show the same meaning as before. Parameter τ﹥0 reflects the differentiation between two activities or the losses from consuming one activity other than the ideal one. In general, τ can be treated as transportation costs or dissatisfied costs. Larger values of the transportation parameter reflect increased differentiation and therefore less intense competition between the activities.[2]
Moreover, in (1) and (2), parameter 1≧δ>0 measures the variety-seeking intensity[3] of both tourists H and L. Therefore, tourists have higher intensity of variety-seeking when δ is closer to 1. And tourists have lower intensity of variety-seeking when δ is closer to 0.
Obviously, by observing (1) and (2), the sufficient condition of a tourist H chooses activity H first then choosing activity L instead of activity H is β ≧ τ(1-χ). Hence, the reason tourist H choosing activity H then activity L is under the condition that the basic value of activity L is higher than it’s dissatisfy cost. Similarly, the sufficient condition of a tourist L choosing activity L then activity H instead of activity L is θ ≧ τχ.
2.3 Profit and equilibrium price
Now, we discuss the interaction between the firm and the tourists using two-stage game. The concept of subgame-perfect Nash equilibrium is applied here. At the first stage, the firm decides a single price. At the second stage, two different groups of tourists make their choices under the given price. Thus, in the second stage, the utility function (1) implicates that the condition of a tourist H choosing activity L after activity H is indifferent from choosing nothing is
(3)
Also, in the utility function (2), the condition of an L type tourist choosing activity H after activity L is indifferent from choosing nothing is
(4)
Therefore, according to (3) and (4), the firm chooses a price to maximize its profit, . After calculation we conclude that
(5)
By substituting (5) for (3) and (4), we find:
(6)
(7)
On the other hand, by substituting (3), (4) and (5) with profit function, we derive
(8)
Inspecting equation (5) to (8), we obtain the following results:
Proposition 1
In light of proposition 1-(1) we can conclude that the higher the basic values consumers obtain from the activities provided by the firm, the lower the transportation costs of consumers are (consumers are more unsatisfied by the activities provided by the firm), or the higher the marginal costs of production are, then the higher the price will be. Interestingly, the influence of the intensity of consumers’ variety-seeking behavior on price depends on the basic values they gained from the activities. That is to say, the intensity of variety-seeking behavior only affects the price in the positive way while touristrs’ perceived values from the activities are higher than the marginal cost they faced. So, the variety-seeking behavior does not necessarily cause the increase of the pricing level.
Proposition 1-(2) interprets that after the basic values of tourist H increase ,namely both activities having higher quality, the population of tourist H who chooses the firm will increase. Reversely, if the basic values of tourist L increase, the population of tourist H will decrease due to the higher price. We can derive the same implications by observing proposition 1-(3). Therefore, this is to say that the basic values of tourist H gained from his preferred product have negative externality relatively to the basic values of tourist L. And, the transportation costs affect the population of both type tourists in negative way. Moreover, if the basic values from tourist H are relatively higher than the basic values from tourist L and transportation costs, then the variety-seeking behavior of tourist H will induce negative effects to decrease their willingness to choose the firm. For the same reason, the variety-seeking intensity of tourist L will produce the similar effect on the population choosing the firm.
Finally, proposition 1-(4) shows that the higher the basic values from both activities, the higher the profit of the firm has. And the transportation costs affect the firm’s profit in a negative way. The effect of variety-seeking behavior upon the firm’s profit depends on whether the sum of basic values from both activities is higher than the total of transportation costs and marginal costs or not. In other words, the effect of variety-seeking behavior upon the firm’s profit depends on what the product’ qualities and how consumers evaluate the qualities.
3. Different Pricing
In last section, tourists pay a single price for the different activities. In this section, we analyze a different strategy in that different activities no longer charge a single price but different prices. Therefore, if tourists like to pursue the marginal utility from variety-seeking, they have to pay for another activity to fulfill the potential pleasure from diversifying the choices. So, we modify the utility function (1) and (2) into:
(9)
(10)
As we did in last section, the utility function (9) implicates that the condition of a tourist H choosing activity L after picking activity H is indifferent from choosing nothing is
(11)
Also, in the utility function (10), the condition of a tourist L choosing activity H after activity L is indifferent from choosing nothing is
(12)
Therefore, according to (11) and (12), the firm chooses the prices, PH and PL, to maximize it’s profit, . After calculation, we acquire
(13)
and (14)
By substituting (13) and (14) for (11) and (12), we obtain
(15)
and (16)
Besides, by substituting (13) to (16) with profit function, we find
(17)
By observing (13) to (17), we reach the following results.
Proposition 2
Proposition 2-(1) demonstrates that the higher the basic values tourist H gains from two activities, the lower the basic values tourist L has, the lower the transportation cost or the lower the marginal cost is, the higher the activity H is priced Similarly, proposition 2-(2) highlights that the lower the basic values tourist H gains from two activities, the higher the basic values tourist L has; the lower the transportation costs are, the higher the activity H is priced. Regarding the influence of variety-seeking behavior upon firm’s pricing strategy, if the net benefits activity H provides to both types of tourists are larger than the net benefits activity L provides to all tourists, then the more intensive the variety-seeking is, the higher the price of activity H. Reversely, we have similar results from proposition 2-(2). If activity L brings higher net benefits than activity H to all tourists, the price of activity L increases with the intensity of variety-seeking.