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55th Congress of the European Regional Science Association: "World Renaissance: Changing roles for people and places", 25-28 August 2015, Lisbon, Portugal
Tourism has long been important part of the economy. Specifically, it serves as a kind of resource that performs a significant role in national economies. With the rise of globalization, cross-border tourism has grown and induced intense competition among counties. The present paper highlights the situation in which the citizens of two countries have the opportunity to travel domestically and cross the border of the other country. The governments of both countries are assumed to be attempting to maximize the social welfare of their respective countries by choosing the appropriate domestic tax rates. The domestic tax serves as the source of funding for the improvements to the infrastructure of domestic tourism, including the areas of security, public facilities, natural areas, and artificial scenic construction. In the process, both governments compete for the attention of tourists. Each country in this game has a tourism industry in place. The two competing industries set the price of their services, including entrance fees or so, to maximize their profits and overtake each other. We consider two cases in the sequential game: (1) the case in which the tourism industry is the leader and (2) the case in which the government is the leader. We consider the factors that influence the tax rate and national income of both countries and identify a feasible strategy for their governments to maintain the attractiveness of their respective countries to tourists while remaining competitive. In the case in which the tourism industry is the leader, tax rates are found to be strategic complements, but each tax rate is independent of the wage rates of both countries. Moreover, the prices set by the tourism industries may be strategic substitutes under certain condition of parameters, in Nash equilibrium of this sequential game (1). In the case in which the government is the leader, the prices set by the tourism industries are found to be strategic substitutes. The price is in reverse proportion to the domestic wage rate, yet is in direct proportion to the foreign wage rate. The tax rate is in reverse proportion to the domestic wage rate, yet is independent the foreign wage rate, in Nash equilibrium of this sequential game (2). Finally, assuming some specific values for the parameters, we compare the outcomes of the two-type games. We found that the leadership of the governments is not always beneficial even from the consumersf point of view by the simulation.
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