This article applies a discrete-choice equilibrium model with product differentiation to study the rural tourism industry in Israel and to jointly estimate the effect of lodging and farm characteristics on consumer preferences and firms' costs. The model accounts for heterogeneity in tastes and technologies and allows for unobservable product characteristics. We find evidence for technological synergy in the joint production of agricultural goods and rural tourism services, but none in the demand. The differentiation in the industry is the major contributor to the price-cost margin, which averages 62%. An additional minor cause is government regulations, which restrict supply. Simulation results demonstrate the growth potential of the industry and show that the government can play an important role in catalyzing growth via investment subsidization, deregulation of supply and information distribution.
Bibliographical noteFunding Information:
Financial support from the Agricultural Economics Research Center, the Agricultural Chief-Scientist fund and the Horovich fund are appreciated.
- Differentiated goods
- Oligopoly markup
- Rural tourism