Market size, scale economies, and tourism market structure: A case of historic water town tourism in China

• Structural evolution of historic water town tourism market in China is examined.
• Market dynamic simulation is performed using D-S model and ABM on Netlogo platform.
• Scale economies and market size are opposite forces for market structure evolution.
• First-movers have advantages in fixed cost investment and late entrants have to compete on innovation and differentiation.
• Market structure evolution shows complexity, historical contingency and path dependence.

The historic water towns in the Tai Lake Basin are representative of tourism products featuring a unique cultural heritage landscape and the local way of life in eastern China. Since the 1980s, this market has experienced phenomenal growth in both the quantity of water towns and the scale of tourist arrivals. Drawing from industrial economics theory and an agent-based modeling approach, we examine the structural evolution of this market. Simulation results show that scale economies and market size are a pair of opposite forces driving the evolution of the historic water town tourism market structure, where scale economies play a role as a barrier to deter potential entrants and ensure superprofits for existing water towns, while an expanding market size creates opportunities for entry. Theoretical and practical implications are discussed, and management recommendations are made for tourism destinations competing with identical products and services.