Observing the unobservable? : Segmentation of tourism expenditure in Venice usingunobservable heterogeneity to find latent classes

University essay from Högskolan Dalarna/Nationalekonomi

Abstract: Consumer segmentation based on expenditure are usually done by using observedcharacteristics, such as age and income. This thesis highlights the problem with negativeexternalities which Venice suffers from, due to mass tourism. This thesis aims to assesswhether unobservable heterogeneity can be used to detect latent classes within tourismexpenditure. Segmenting the tourism market using this approach is valuable for policy making.Segmenting is also useful for the actors in the market to identify and attract high spenders. Inthat way, a destination may uphold a sustainable level of tourism instead of increasing touristnumbers. The method used for this approach is finite mixture modelling (FMM), which is notmuch used within consumer markets and therefore this thesis also contributes to tourismexpenditure methodology. This thesis adds to the literature by increasing the knowledge aboutthe importance of unobserved factors when segmenting visitors.The results show that four latent classes are found in tourism expenditure. Some of thevariables, which are significant in determining tourism expenditure, are shown to affectexpenditure differently in different classes while some are shown not to be significant. Theconclusions are that segmenting tourism expenditure, using unobserved heterogeneity, issignificant and that variables, which are barely significant in determining the expenditure ofthe population, can be strongly significant in determining the expenditure for a certain class.

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