August 19, 2016 Reading Time: 2 minutes

When large businesses expand or enter a new market, we can expect some degree of change, and often, some smaller businesses will go out of business. But observers often overestimate such trends, predicting that small businesses will become obsolete. As I discussed in my recent research brief, there are areas in which small businesses are likely to outperform their competitors, potentially leaving room in the market even as larger businesses grow. The travel agency industry over the past two decades is a prime example.

As more and more consumers booked travel online, many traditional “brick and mortar” agents were forced out of the market, but others found ways to play to their strengths and sustain their business.

I first thought about travel agents in graduate school, when I was interested in how the rise of e-commerce was affecting retail industries. Until the late 1990’s, booking air travel was agents’ bread and butter. But as consumers began to purchase tickets online, traditional agents, typically small and independently owned, had to adjust or leave the market. Many observers predicted the end of the traditional travel agency.

But the industry adapted. It touted its advantages over online platforms in booking packaged tours and other more complex travel. While I couldn’t directly observe brick and mortar agent profits over time from different types of travel, I was able to observe how many agents stayed in business in each local market, and used this along with data on demand for air and more complex travel services to estimate the composition of agents’ profits over time (this statistical technique was developed by economists Tim Bresnahan and Peter Reiss). While estimated profits related to air travel virtually vanished between 1998 and 2003, I found no significant decline in agent profits related to cruises and packaged tours.

A look at the number of travel agents in the U.S. over time helps confirm the idea that many agents were able to weather the storm. The number of agents fell by about 12,000 from 1998 to 2005, but the decline slowed to about 4,000 in the following seven years. While there has been an uptick since 2012, industry employment has remained flat, suggesting a rise in independent contractors related to the sharing economy.

I’ve discussed how small businesses are often better positioned than their rivals to form relationships with customers and understand the specifics of demand in their local market. These are exactly the type of traits that help traditional travel agents book complex travel arrangements for their customers. Growth in large businesses, whether enabled by technology or simple expansion, will inevitably change markets and force some firms out of business. But many firms can and do survive by playing to their strengths.

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Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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