Tourist Economics

I recently spent the weekend in a classic mid-Atlantic beach town, Ocean City, Maryland. While there, I couldn’t help but put on my economist hat, as there were some things about the town that stood out to me.

First of all, the geography of the area means the town is set up like the classical economic thought experiment of a linear market: there’s basically one long road with all the businesses, and water just a couple blocks away on either side. The entire stretch is a mix of hotels & condos, restaurants, beach accessory stores, and grocery/liquor stores, with the occasional pharmacy. There was very little geographic differentiation, i.e. restaurants weren’t mostly clustered in one area.

What was striking to me was the near total absence of popular chain restaurants. In the city itself, I didn’t see any Starbucks, Chipotle, McDonalds, Panera, etc., which seemed very strange. In any other similarly populated area you’d find quite a few; and indeed, just outside the city there were several such establishments in outlet malls. So what could explain this? I have some potential explanations:

  • Consumer preference: Tourists prefer different types of restaurants when they are on vacation; they’d rather not go to the same places they go at home. Usually, the appeal of chain restaurants is that they are the same wherever you go, so you know what to expect. Being on vacation may flip that preference sufficiently that there isn’t enough demand for many such establishments.

 

  • Regulation: The local government has provisions that make it difficult for large chains to get established. You see this often enough in municipalities. Several years ago, when Wal Mart was first looking to expand into DC, the city council tried to pass a law that, while not naming Wal Mart, was obviously targeted at them. The already established players in the town have a strong incentive to prevent new competition, and it’s pretty easy to get this kind of stuff passed in small towns. The fact that just outside of the city limits you find plenty of Paneras and Dunkin Donuts, etc., suggests this might be a big factor, though it could be there’s more stable demand further inland.

 

  • Seasonal Demand: According to Wikipedia the actual residential population of Ocean City is around 7,000 people, but during the summer months the number of people swells to the hundreds of thousands. As such, the vast majority of businesses are probably shuttered during the off season. It could be that large chains just don’t do seasonal hiring very well; often hiring in such companies is an arduous process. I know from experience with a large retail chain that it often takes weeks to onboard just a cashier. I noticed that at most restaurants the staff working were from Russia/Eastern Europe, which reminded me that I often saw that at the tourist attractions in my home state of South Dakota. So in addition to short time hiring, the fact that most labor has to be imported from abroad through visas to meet demand might be a step too far for most large chains. Another related explanation could be that large chains don’t break even unless they’re open longer than seasonally. But if anything, I’d think the opposite would be true, since smaller businesses don’t have the economies of scale to reduce costs.

 

  • Search Costs: Search costs are relatively high when your hotel is across the street from the primary attraction, The Beach. There’s a high opportunity cost of time; every second you’re out looking for food is a second that you’re not on the sand. This would explain why there’s a pretty even mix of types of establishments all along the main corridor. Yeah, you could go searching for the best burrito place in town, but the pizza+burger place next to the hotel is probably good enough. This could lead to a situation where already established, mediocre independent restaurants are able to survive and hold onto their turf, but doesn’t explain why a Chipotle or whoever couldn’t eventually get in on the action as well.

 

Any explanation has to account for the fact that there are some chain restaurants present, but they’re mostly smaller regional chains, like Ledo Pizza or Grotto Pizza. I probably lean towards the regulation and seasonal demand explanations, but would love to know if there’s a literature on this.

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