Money Illusion for Tourists

Abstract

Previous research identified money illusion effects in currency exchange situations. When using foreign currencies previously acquired price knowledge, usually referred to as internal reference prices, cannot be applied directly anymore and the perception of prices changes as a consequence, leading to altered purchase likelihoods.

This had been studies thoroughly during the introduction of the €, showing that changing to a lower nominal value currency increases the willingness to pay, while changing to a higher nominal value currency decreases the willingness to pay. However, this theory has never been applied in the tourism context, although international tourists face foreign currencies every day. In order to test for possible money illusion effects for international tourists, a quantita-tive research approach has been chosen and questionnaires have been handed out to European and Chinese visitors to New Zealand, asking them to rate products based on purchase likelihood and expected quality. The results show indications for money illusion and therefore imply that tourists may alter their purchasing decisions when dealing with a foreign currency. This study extends the existing literature to a new application area and demonstrates that money illusion is a topic of great interest in the tourism and pricing areas.