British tourism demand elasticities in Mediterranean countries

Abstract

We use the almost ideal demand system (AIDS) model developed by Deaton and Muellbauer (1980) to estimate tourism demand elasticities for a number of Mediterranean countries (Cyprus, Greece, Italy, Malta, Portugal, Spain and Turkey) in relation to tourists originating from the United Kingdom during the period 1963 to 2009. Using the restrictions imposed by theory, we find that the model is able to explain developments in market shares reasonably well, despite the large and at times sudden changes in market shares over the sample period. Our share estimates indicate that while Spain and Portugal managed to keep a stable market share over time, Malta and especially Italy lost market share to Cyprus, Greece and Turkey. Overall, we observe that Italy and Spain have the lowest own-price elasticities, whereas Greece, Portugal, Spain and Turkey are expenditure inelastic holiday destinations. We also improve over the traditional treatment of the AIDS model in the literature by studying the stability of the estimated elasticities over time using recursive estimates. The results indicate that some elasticities are indeed time varying and highlight the potential pitfalls of assuming fixed and stable elasticities over a long period, as is customary in the tourism literature.

Keywords:

• tourism demand
• almost ideal demand system
• demand elasticities

JEL Classification:

• C3
• D12
• L83

Acknowledgements

The authors would like to express their gratitude to Dr Andreas Papatheodorou for providing an important share of the historical data used in this study, as well as Dr Alexander Apostolides for providing data for Cyprus. The authors would like to thank Mr Leslie Vella, Director of Marketing Support and Development at the Malta Tourism Authority, for invaluable discussions on the evolution of Mediterranean tourism since the 1960s; and an anonymous referee for helpful comments and suggestions. Thanks are also due to participants of the International Conference on Tourism (ICOT), held in Limassol, Cyprus, in June 2013, where an early version of this study was presented. The opinions expressed in the article are the authors’ own and are not necessarily those of the Central Bank of Malta or the University of Malta.