Introduction

Global production network (GPN) analysis is based on the link between product and factor market outcomes. Nathan and Sarkar (2011) and Milberg and Winkler (2013) argued that rents are usually concentrated in one part of the chain, that of the lead firm, while the manufacturers or suppliers received merely competitive or normal profits. Competitive profits result in employees or service providers of supplier firms receiving merely competitive wages, while employees in lead firms could hope to share part of their firms’ rents. The result of rents to lead firms and competitive profits to suppliers depends on a particular market structure, i.e., that of oligopolistic-lead firms and competitive suppliers. Oligopolistic-lead firms could be price makers in both final and intermediate product markets. But what if the lead firms were themselves in a highly competitive market? Kaplinsky (2007) pointed out that in such a situation price competition would transform the rents of lead firms into consumer surpluses.

This effect of highly competitive markets at the level of both service suppliers and lead firms is looked at in this paper in the context of the rise of the ‘zero-fee’ tour in Chinese tourism. An unusual and notable feature of tourism in China has been the rise of the zero-fee tour, or, even more extreme, the buying of tourists, whereby service providers pay the outbound tour operator (OTO) for the tourists provided. Who then pays for the service providers and how is this done? These questions need to be answered if we are to understand this phenomenon. More important, however, is understanding the factors that have led to the rise of this phenomenon, its possible negative or downgrading effects on the tourism services’ network and ways of dealing with it. This paper takes up these questions in the light of the GPN analysis mentioned above.

We start by laying out the basic structure of the tourism services’ production network, along with its associated cash flow system, and then go on to consider how the zero-fee mode changes the usual cash flow system. This is followed by an analysis of both supply- and demand-side factors and the way they work through the production structure. The fieldwork for this study was conducted in Lijiang and Shangri-la in Yunnan province and at the Great Wall at Badaling. These areas were chosen as representing indigenous, or minority, and mainstream or mass tourism, respectively.