#1: State Role in Market Failures

The Case for Govt. led Digital Aggregator Platforms in Tourism

Samparna Tripathy
6 min readNov 14, 2020

Government’s role in free markets

In a recently released book on Economic Policy titled “In Service of the Republic”, economists Vijay Kelkar and Ajay Shah outlined a popular framework to gauge the necessity & desirability of governments to intervene in free markets. Followers of the classical Keynesian cabal would concur that free markets may not always operate at the perfect equilibrium and could often result in inefficient distribution of goods and services. Termed as “market failures”, these situations may look up to restoration in balance via State intervention provided the State can do so. To apply my understanding of this concept, I thought of choosing tourism as a market and examining the logic of governments funding digital infrastructure projects in this sector.

“The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.” — John Maynard Keynes

Identifying Market Failures in Tourism

The global COVID-19 pandemic has hammered the tourism market to a great extent. As per a recently released McKinsey report, the recovery is quite slow and may take as long as 2024 to reach the pre-CoVID levels (i.e. expenditure of around 9 trillion USD). This situation potentially puts 120 million jobs at risk straightaway. Hence, it should be worthwhile to analyze market failures and reimagine the role of governments in expediting this recovery.

Market Failure 1: Market Power

With the proliferation of smartphones and affordable internet connectivity, digital travel product sales is estimated to grow at a compounded annual growth rate (CAGR) of more than 15% in India. Amidst the global pandemic, the traveler may be less keen to physically visit the brick and mortar travel agent shop and instead opt for online bookings on short notice. This poses a challenging situation for the fragmented SMEs that constitute the backbone of the tourism economy in India.

Many of these SMEs haven’t been able to adapt to the new “digital normal”. First, there is the handicap of low levels of digital literacy and language barriers that exist in many places. Second, the big fish in the sea are splurging in ad spends & other promotional activities to gather eye-balls of potential tourists and the small fish just cannot afford to have similar levels of engagement and reach. Commission rates going up as high as 25% also make it difficult for SMEs to piggyback on private online travel aggregators (OTAs) for digital bookings.

As a sector, tourism employs a wide variety of talent — the heritage hotel vs the modern homestay, the family tour operator vs the solo wildlife trail agent, the Dravidian architecture blogger vs the destination wedding photographer. The taste and preferences of travelers today are so diverse that there is a need for a market that empowers freelancers, startups, or established business houses alike. If only one side of the market yields disproportionate power, the outcomes are less than desirable thus leading to a “market failure”.

Market Failure 2: Information Asymmetry

One of the consequences of market power is the monopolization of information available on the internet. This implies that consumers may not always have the most relevant, superior quality and optimally priced tourism experiences to choose from. This information asymmetry is another type of market failure that can be corrected by governments offering a level playing platform to all stakeholders.

It may be worthwhile to explore another dimension of information asymmetry i.e. lack of trust. We essentially live in a low-trust society and have different trust perceptions depending on the source. To scout for experiences, people may follow travelogues that intimately discover places through art, history & folklore. To get the best deal, people may religiously go through Trip Advisor reviews and dig out nuggets such as “which is the hotel room with the best view” at the same price.

However, on questions of safety (of transport & stay), travelers tend to rely on information furnished in government websites. This has become even more evident during COVID-19 pandemic where governments that have taken a lead in transparent communication around safety protocols have been rewarded with a surge in travel bookings. And countries where confusion on safety persists, the information asymmetry is dissuading potential travelers from booking their next holiday to that place.

Market Failure 3: Externalities:

In a market, there is an agreed exchange of value between a buyer and a seller. What happens as a result of this transaction to the world outside doesn’t get factored in the calculation of price. Hence the free market has a tendency to under produce things that could have beneficial effects on the society (i.e. positive externalities) and over produce things that could have adverse effects on the society (i.e. negative externalities). Such externalities are also examples of market failures.

In the context of tourism, take the example of a ticket price to a newly discovered Buddhist relic. Based on the value they expect to derive from the visit, tourists may be willing to shell out max 25/- INR per person for a ticket. And the market shall price the ticket accordingly. The footfall to the site may boost employment for many locals and plowing back any margins in marketing the place could uplift the local economy. But the market doesn’t factor such positive externalities in its economic decisions. Similarly, since the tourist doesn’t pay for the pollution he causes, the demand explodes at the cost of the sustainability of the environment. And the market fails to adjust to accommodate such negative externalities.

Govt. funded Digital Aggregator Platforms

In the context of the market failures that exist, the decision of governments to invest in digital aggregator platforms makes sense. Such platforms bridge the digital gap prevalent in the fragmented tourism market and provide a level playing field for all products & services that meet minimum quality benchmarks. Australia Travel Exchange & Odisha Tourism are some good examples of platforms that act as matchmakers and seamlessly connect a variety of suppliers, distributors, and consumers. This adds diversity to the tourism offerings and the audience segment it caters to — thus enhancing the attractiveness of the destination.

The digital marketing spends incurred by state governments in promoting offbeat destinations & trails on its platform may be highly effective in generating employment in underserved areas or reducing tourism pollution in the over-congested hotspots. Also, the fact that booking of many eco-tourist destinations is restricted to State tourism platforms is also an example of the State stepping in to address concerns of sustainability. This shall prevail until the market develops models to reward sustainable & responsible tourism.

There’s some empirical evidence supporting the claim that the highest level of trust is afforded by potential tourists to information provided on government tourism websites. This is a cue for governments to efficiently manage the content on tourism offerings on their websites. Since the online consumer is fickle & has limited attention span, content should be personalized and structured around user journeys so as to convert a website visit into an actual tourist footfall. There is definite value in governments taking up the mantle of digitally transforming tourism.

The post pandemic beginnings are already underway. Odisha Tourism is leveraging Adobe Digital Experience Platform stack to manage TBs of multimedia content for its second edition of Eco-Retreat program. Companies registered under the Singapore Tourism Board are extracting tourist insights from Singapore Tourism Analytics Network to plan for their post pandemic recovery.

The logic for State intervention to address market failures may be in the right place. However, even the most well-intended policies may fail to achieve results if the State, on account of its inherently coercive nature, deepens inequalities of power structures in the market instead of correcting it. In the words of Vijay Kelkar and Ajay Shah, it is wise to be “skeptical of the government” and watch out for the impact of their interventions. In this context, impact assessments covering metrics such as overall registrations of tourism SMEs, ROI of promotional campaigns, and tourist footfall attributed to digital discovery on the state tourism portal should also be prioritized.

Like all policy decisions, this case too shall be put to test of time!

Amen !