Investments in Ski Areas: Effects of Compensation Payments in a Complementary Value Network

Abstract

This study focuses on a complementary value network consisting of a snow sports company operating in a ski resort and accommodation businesses located in that resort. If the snow sports company increases the resort's attractiveness by investing in new infrastructure, such as ski lifts or snowmaking facilities, its investment has positive external effects on the revenue of local accommodation businesses. If the cost of these external effects is not compensated by the accommodation businesses, this situation typically creates an underinvestment problem at the expense of the snow sports company. In this context, the authors analyse the extent to which revenue-based and quantity-based compensation payments can mitigate the problem. First, they identify conditions under which such payments increase the profits of both the snow sports company and the accommodation businesses. They further show that a revenue-based compensation payment dominates a quantity-based compensation payment with respect to company profit maximization, because it distorts neither the price nor the quantity decisions of the accommodation businesses.