An Economic Analysis of the Tourism Industry -
Implications of the Online Travel Intermediary

Peter J. Ryan
Pongsak Hoontrakul

forthcoming in Chulalongkorn Journal of Economics. 
(published 3 times a year: January, May and September) 
(draft created 1/23/2004)

page 16

Further implications concern the possibility of increasing the liquidity of 
the existing forward market. Commodity and financial markets evolved from 
individual forward contracts between grower and miller, or between financial 
institutions and counterparts, resulting in organized futures exchanges with 
greatly increased liquidity; analogously, one can envisage a formal liquid 
market with differing delivery months, grades of product, and routes for 
airline seats and locations for hotel rooms. It is neither possible nor 
necessary to cover all locations and routes, nor need all grades be covered. 
As is the case for the fixed income markets, representative standard 
locations (e.g. Hong Kong, Bangkok), routes (Los Angeles-Hong Kong, 
London-Bangkok) and periods would parallel bonds or money market instruments 
by different maturity and issuer. These would serve to cover the basic 
tourism demand uncertainty and allow hedging via swapping, with 
experience-based premiums and discounts for underlying products. (If this 
should appear unrealistic, it is worth considering the recent proposal for 
“terrorism futures.”) In addition, a reliable and enforced certification 
program would be needed to establish grades of service and avoid adverse 
selection problems.

Beyond the more immediate extension of existing, informal forward contracts 
to standardized futures, the alternatives of standardized options and swaps 
between larger intermediaries should also be considered. The fundamental 
issues involved in these derivative markets include uncertainty and desire 
to hedge the risk exposure, variability of supply, demand or both influenced 
by economic and political events, need for liquidity, the existence of 
speculators willing to provide that liquidity, default risks, and 
representative instruments on which contracts can be designed. All of these 
features apply to the travel and tourism industry.