Mixed Strategy Pricing Behaviour in the UK Package Tour Industry

Abstract

In a market, such as that for package tours, in which products are weakly differentiated and information is fuzzy, consumers may adopt search behaviour such that effectively, they play mixed strategies in the selection of the product that they choose to purchase. Tour operators' best response to this behaviour is mixed strategy pricing. Mixed strategy pricing is likely to mean that the variances of prices will be different at different points during the season for each operator. A simple model is formulated to illustrate the sequence of moves and the behaviour of variances. Brochure data for the summer seasons of 1982 and 1995 is analysed to investigate whether variances differ at different times during the season and thus differ systematically with the level of demand. The weight of evidence generally supports the view that operators adopt mixed strategies when setting brochure prices, even if achieved unconsciously through the application of rules of thumb. Strong evidence is found of the form that one operator, at least, produced a pattern of variances that is statistically significant and that could not result from the method of analysis adopted in the paper or from an ad hoc allocation of its fixed costs.

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