Elasticities relevant to tourism in Scotland: evidence review

An overview of estimates of price elasticities of demand (PED) and income elasticities of demand (YED) for tourists to destinations relevant to Scotland; price elasticities of supply (PES) of commercial accommodation relevant to Scotland and other factors influencing the demand and supply of tourism.

5 Conclusion

5.1 Summary of findings

Through a systematic literature review, this report provides an overview of recent estimates of elasticities for tourism destinations, tourist-generating markets and commercial accommodation. Empirical evidence in the literature on tourists' responses to changes in taxation was also reviewed. However, due to the unavailability of studies on Scotland, the evidence reviewed in this report was based on similar destinations identified in a cluster analysis. The results should be regarded as a possible approximation rather than the actual elasticities for Scotland.

It has been found that the overall median PED for European destinations is on the borderline between elastic and inelastic (-1.02), while the overall average indicates an elastic demand (-1.26). In terms of the YED, outbound tourism is likely to be perceived as a luxury consumption by tourists from most European countries/regions as well as Scotland's top source markets. As for the most relevant destinations to Scotland, the results based on the overall median estimates suggest that the inbound tourism demand is likely to be price elastic and to be perceived as a luxury consumption. However, the findings are based on limited recent evidence for destinations relevant to Scotland. The relatively wide ranges within the elasticities for destinations that might be relevant to Scotland indicate considerable uncertainties potentially caused by the difference in the modelling methods, explanatory variables, destination-source market pairs and data used in the studies. Cautions should be exercised when interpreting the findings.

In the search of recent literature on the price effect of tourism taxation, only a limited number of primary studies were identified. In line with the law of demand, a general understanding of the price effect of taxation is that an increase (or decrease) in tourism taxes may lead to a decrease (or increase) in the quantity of tourism demand, with other factors remain unchanged. However, the impact of an increase in tourism taxation on tourists' expenditure would depend on the tax in question, consumers' PED, the PES, and other factors influencing both demand and supply. For instance, between VAT and accommodation occupancy taxes, past literature argues that the latter tend to have a more moderate effect on tourism demand, but they are likely to induce a psychological impact on tourists and could affect repeat tourism. As for different travel purposes, business travellers and non-coastal holidaymakers tend to have a price-inelastic demand, while the demand of leisure travellers particularly coastal holidaymakers is likely to be price elastic. Therefore, an increase in tourism taxation would likely result in higher tourism receipts from business travellers and non-coastal holidaymakers, but lower receipts from leisure travellers especially coastal holidaymakers. In addition, most of the studies on the impact of tourism taxation focused on the price effect of tourism taxes. Tourist behaviour is also affected by non-price factors such as advertising and news, of which research is currently scant.

5.2 Limitations and future research agenda

Due to the unavailability of studies on Scotland, the evidence reviewed in this report was based on similar destinations identified in the cluster analysis. The results provide a possible approximation rather than the actual elasticities for Scotland. Moreover, only the literature published in English and indexed by the three main databases (Scopus, the Web of Science and Google Scholar) was included in the search. Studies available in other databases and other languages were excluded. There are also limitations in the evidence itself. The source markets within the evidence only cover two of Scotland's top ten international source markets. The inconsistent levels of theoretical and methodological rigour in the modelling methods, variables and data caused uncertainties in the results summarised.

A significant gap in the existing literature is that there's no direct evidence for Scotland. To address this gap and build a more reliable and relevant evidence base for tourism in Scotland, future research could focus on primary research underpinned by rigorous modelling methods utilising various primary and secondary data sources.

To estimate the price and income elasticities, the AIDS and time-varying parameter (TVP) modelling are well-established approaches to analysing tourism demand. The AIDS model is a system-of-equations approach examining tourism expenditure shares across a group of alternative destinations for a source market. As the cross-price elasticities associated with the estimated equations within the system have a strong theoretical base, the relationships between alternative destinations can be effectively evaluated. With the TVP approach, the estimates of elasticities are allowed to vary over time so the behavioural change of tourists can be traced (Song and Wong, 2003). Spatial econometric modelling (Yang and Fik, 2014; Li et al., 2016) can also be used to study the competitive or complementary effect of price changes across neighbouring destinations of Scotland.

In terms of the variables, tourist arrivals or expenditure, own and substitute relative consumer price indices (CPIs) adjusted by exchange rates, real GDP can be used as the measures of tourism demand, price levels in Scotland and substitute destinations, and tourist income, respectively (Song et al., 2010). Control variables such as dummy variables of one-off events (e.g., financial crises and disease outbreaks), the distance and climate difference between origins and destinations can also be included. The time series data of tourist arrivals or expenditure can be found from the UNWTO and VisitBritain databases. CPIs, exchange rates, real GDP, climate data including average temperature and precipitation are available from the World Bank Open Data and Office for National Statistics (ONS). The distance between capital or major cities can be calculated using the UNGEGN database.

In addition to research on price effects, survey-based tourist behaviour research on non-price effects of tourism taxes is also necessary to reach a fuller understanding of the overall effect of tourism taxation on tourist behavioural changes. The psychological effects of multiple external and internal factors such as advertising and news about the tourism taxes on tourist satisfaction which eventually leads to destination loyalty. The structural equation modelling (SEM) is often used to investigate the relationships between both observed and latent variables.



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