Revenues and Asymmetric Information

Abstract

When planning and making travel decisions, tourists often lack sufficient information about two important aspects of their purchase decision: the quality of the service they are about to purchase and the possibility that their desired destination will be sold out before they place their reservation. An economic model is developed to explain the implications of these uncertainties where tourists resort to using the price of the service as an indicator of the two unknown quantities. The analysis indicates that the extent to which rates serve as a signal determines the maximum revenue the service provider can achieve. It further demonstrates that the impact of the signals on revenues can be either positive or negative. The tourism service provider controls the size of the information gap and, as such, the asymmetry should be viewed as a strategic issue. For efficient revenue maximization, decision makers ought to integrate the control and management of these two elements of information into their revenue management policies.

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