Tourism, congestion, taxation, and strategic interaction

This paper examines the strategic interaction between firms and governments in two Small Island Tourism Economies (SITEs). In a situation where congestion can threaten the viability of tourism industries in SITEs, we highlight the role of two factors that determine the distribution of tourists across SITEs: whether the tourism market is vertically or horizontally differentiated, and the extent to which tourists care about congestion. Under these circumstances, counterintuitive results are possible: congestion in a SITE may rise in response to tourists caring more about congestion in the SITE. Moreover, maximising tourism tax revenue emerges as a dominant strategy for governments.