Article

Effect of Price Instability on Hotel Profitability

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Abstract

This paper investigates the influence of price instability on hotel profitability based on Taiwanese international tourist hotel operation data from 1996 to 2008. According to Tisdell (1963), price instability leads to a decrease in the profits of an entrepreneur if the output, once planned, is unalterable. The inflexible supply and volatile demand of the hotel industry offer an ideal case study to confirm Tisdell's theory. This paper provides an empirical test of Tisdell's model, and the authors find that price instability has a statistically significant and negative effect on hotel profitability. The study results lend support to the validity of the price instability hypothesis in Tisdell's model.

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... Chung, 2000;Enz et al., 2009) or relative price fluctuation (e.g. Chen and Chang, 2012). An exception was the study of Noone et al. (2013), which found empirical evidence that supports the importance of considering the two key dimensions simultaneously. ...
... The lodging industry's volatile demand and inflexible supply (Baum and Mudambi, 1995) fit better with the assumptions of Tisdell's price instability theorem. In addition, a number of studies have empirically supported a relationship between higher price variation and lower profit (Chen and Chang, 2012;Noone et al., 2013). ...
... change in management company, renovations, etc.). Empirical evidence shows that hotels practicing high relative price and low price fluctuations enjoy a higher financial performance (Chen and Chang, 2012;Noone et al., 2013). Therefore, hotels in dynamic high are suggested to keep the high relative price, yet in a steady manner rather than changing the prices too frequently, to maximize their financial performance. ...
Article
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Although strategic pricing literature identifies two key dimensions of relative price position and relative price fluctuation, only recently has relative price fluctuation started to gain attention in the hospitality and tourism literature. Given the theoretical and empirical support for considering both dimensions in strategic pricing positioning, this study developed a new index that calculates relative price fluctuation: the ADR volatility index. This new index provides a more complete picture of the pricing positioning of a lodging property. Together with a room price positioning matrix, these two new tools can assist hotels in maximizing their room revenues.
... Earlier studies have found that hotel managers do not adjust prices as frequently as suggested by the theory due to the additional operational and menu costs (Barro, 1972; Sheshinski and Weiss, 1977; Akerlof and Yellen, 1985; Mankiw, 1985; Rotemberg, 1982; Slade, 1991). Tisdell (1963) and Chen and Chang (2012a) have shown an increasing in price instability would leads a decrease in hotel's profit. However, it is common for today's hotel business to frequently alter their prices to reflect the changes of seasonality , competitors' price strategies, and various promotion programs. ...
... In the hotel economics and management literature , nevertheless, we found very limited evidence to support such a conclusion. Chen and Chang (2012a) tested Taiwan's tourism hotel data and confirmed the impacts of demand uncertainty and market concentration on hotels' short-run profitability. However, we cannot find any empirical study in the literature focusing on how these two factors affect hotel's long run price stability and profitability. ...
... Previous studies have found the correlation between price instability and hotel's profitability (Tisdell, 1963; Chen and Chang, 2012a). Chen and Chang (2012a) also found that the connection between demand uncertainty, market concentration and hotels' short-run profitability. ...
Article
The object of this paper was to investigate the long-term influences of demand uncertainty and market concentration on price instability in the hotel industry. We applied 1996–2008 price and room revenue data collected by Taiwan's Tourism Bureau to test the following two hypotheses: (1) demand uncertainty is negatively associated with price instability in the hotel industry; (2) the market concentration is negatively associated with hotel price instability. We constructed a two-stage price instability model and the estimate results produced the following two findings: First, the uncertainty in room demand significantly contributed to the price instability. Second, the effects of market structure on price instability were heterogeneous across different levels of price instability distribution. Notably, when the distribution of price instability moved from lower to higher quantiles, the relationship between market concentration and price instability altered from positive to negative.
... There is a non-linear relationship between F&B price and F&B satisfaction due to the two-sign price effect on satisfaction: one positive (as an indicator of product quality) and the other negative (as an indicator of sacrifice). Chen and Chang (2012) point out that price discrimination has become an essential tool to reduce lodging demand uncertainty by setting different price based on customer type, time period and sales channels. Compared with that in an off-peak season, a guest in a peak season (high occupancy) is expected to be less satisfied due to the relatively high room rate and the business itself (Mattila and O'Neill, 2003). ...
... According to Hu et al. (2010) study, price of room (PRICE RM) is measured by average daily room rate while price of food and beverage (PRICE F&B) is measured by dividing the total food and beverage expenditure by the area of equivalent food and beverage. To measure service quality , we employ the ratio of room staff per guest room and the ratio of F&B staff per floor area as a proxy of hotel room service quality (SQ RM) and F&B service quality (SQ F&B) base on Wang et al. (2006) and Chen and Lin (2012) ...
... To the extent that hotels' pricing strategies may have potentially adverse long-run consequences in pursuit of short-term improvements (Bowen and Shoemaker, 1998;Mathies and Gudergan, 2007;Wang and Bowie, 2009), assessing their outcome throughout an extended time horizon is imperative. However, little discussion has revolved around this topic, as stated by Chen andChang (2012, p. 1352) that "no previous studies have attempted to identify empirically the influence of hotel price instability on hotel financial performance". To the best of the authors' knowledge, only Noone et al. (2013) have empirically investigated the long-run effects of pricing strategies in the context of hotels to date, finding that a higher degree of price fluctuation relative to the competitive set tends to reduce hotel performance, thus concluding that maintaining the consistent relative price over time is indeed a long-run revenue enhancing policy. ...
... Not only have these theoretical frameworks shown mixed results of the price changes-performance relationship, "subsequent debates concerning this price instability hypothesis have mostly focused on the theoretical level with few empirical studies to support either side of the argument (Chen and Chang, 2012;p.1352)". In the context of hotels, Chen and Chang (2012) confirmed Tisdell's (1963) theorem finding that price instability reduces hotel profitability. ...
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It is a common belief that businesses performance should not be evaluated by immediate fiscal returns, but rather based on an extended time horizon. While the literature implies that pricing decisions may exert lagged as well as contemporaneous effects on performance, a limited number of empirical studies have focused on such effects. The current study investigates effects of idiosyncratic price movements on short-run and long-run hotel performance, where idiosyncratic price movements refer to the changes in individual hotels’ room rates unexplained by price competition, product differentiation, and market conditions. By analyzing spatial panel data from the Houston lodging market between 2005 and 2014, we find that idiosyncratic price movements enhance hotel performance in the short-run and that adverse effects followed in the long-run. Findings of the study and implications for practitioners are discussed along with suggestions for future research.
... Even if the other elements are fundamentals for improving sales and, consequently, improving profitability, they are related to expenditures (Eddin et al., 2013). Pricing is also the strategy that can be most easily adjusted in response to market changes (Chen and Chang, 2012). ...
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Purpose The purpose of this paper is to investigate and identify the price sensitivity of consumers of three- and five-star hotels and to determine the impact of bundling strategies on consumers’ price sensitivity. Design/methodology/approach To calculate price sensitivity, authors apply the van Westendorp’s price sensitivity meter (PSM). To understand the impact of bundling strategies, univariate and bivariate techniques are applied. Findings PSM results reveal the optimal prices and the range of acceptable prices for three- and five-star hotel. The bundling strategy results reveal that five-star customers are less sensitive to mixed-leader bundling. Regarding mixed-joint bundling, managers could improve sales through bundling strategies if they selected an attractive service (e.g. restaurants). Practical implications Findings assist hotel managers to understand the different price sensitivities, according to the hotel typology. Managers can manage prices without the risk of losing market share or revenue. The results help managers in deciding which bundling strategies they can create, as well as the services to be included to achieve highest profitability. Originality/value No research to date to the best of the authors’ knowledge has attempted to understand and compare the role of bundling strategies in three- and five-stars hotels. Moreover, no research has attempted to measure and compare customers’ price sensitivity of three- and five-stars hotels.
... Their results show that there is a non-linear relationship between F&B service quality and hotel profitability, while the room service quality effect is not significant. Lin and Chen (forthcoming) also investigate the relationship between service quality and market structure to reveal the dominated strategy of service quality depended on the market concentration of hotel scales [2]. As can be seen, adopting service science into the industrial economics can provide a practical vision on analyzing hotel industry. ...
... nt hospitality studies have investigated the issue about the impact of demand uncertainty on hotel operation. Chen et al. (2011) examine the link between demand uncertainty and product variety, and their empirical findings support Carlton and Dana's (2008) theoretical prediction: higher degree of demand uncertainty leads to greater product variety. Chen and Chang (2012) find that when demand uncertainty takes the form of instability in product prices, price instability has a negative effect on hotels' profitability. Chen and Yeh (2012) investigate the relationship between uncertain demand and the failure rates of hotels, and they show that uncertain demand increases the likelihood of failure. Along wit ...
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The purpose of this article is to investigate the impact of demand uncertainty on labor intensity as well as service quality. Theoretical predictions are mixed: on the one hand, risk aversion leads hotels to choose a lower level of capital in response to demand uncertainty, thereby leading to higher labor intensity; on the other hand, the demand-enhancing benefit of service quality may be weakened due to demand uncertainty, thereby leading to a lower service quality decision. Using the data of international tourist hotels in Taiwan, this article shows that demand uncertainty leads to a positive impact on hotels’ labor intensity. In addition, hotels located in markets with a higher degree of concentration, having more diversified revenue sources, or belonging to hotel chains also tend to exhibit higher labor intensity.
... Even if the other elements are fundamentals for improving sales and, consequently, improving profitability, they are related to expenditures (Eddin et al., 2013). Pricing is also the strategy that can be most easily adjusted in response to market changes (Chen and Chang, 2012). ...
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Price bundling is one of the most important pricing strategies in the hospitality industry. This paper aims to investigate the specific importance of mixed-joint bundling strategy in hotels' profitability. Data was gathered through an ad hoc questionnaire, administrated in three and five-star hotels'. Univariate and bivariate techniques were performed to eventually identify statistical differences. The results show statistical differences between bundling with two services and bundling with more than two services included. Bundling strategy with restaurant service included is more attractive to customers in the hospitality industry. With these findings, managers can structure effective but different bundling solutions for both 3 and 5 stars hotels.
... While there is a paucity of investigations that include square footage of room, many have included hotel-level characteristics such as "hotel size" (often proxied by the number of hotel roomse.g. see Balaguer and Pernías, 2013;Becerra et al., 2013;Chen and Chang, 2012;Hung et al., 2010;Mohammed et al., 2019;Zhang et al., 2011b) and "hotel quality," proxied as a star rating (Andersson, 2010;Bull, 1994;Espinet et al., 2003;Israeli, 2002;Kuminoff et al., 2010;Melis and Piga, 2017;Rodríguez-Algeciras and Talón-Ballestero, 2017;Sánchez-Pérez et al., 2019;Thrane, 2005). We include both of these hotel-level characteristics here and expect their effect to be positive. ...
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The authors investigate the effect of location on the nightly hotel room rates charged in Las Vegas. Using a hedonic estimation approach, the authors control for room amenities and hotel and time characteristics. Including 6087 hotel room nights for hotels located near the Las Vegas Strip in two different years (2012 and 2017), the authors estimate the relationship between hotel location and nightly room rates. Consistent with prior investigations, the authors find strong evidence for the effect of location, amenities, and day of week on hotel prices, with a “Strip premium” of 40.21% (US$106.85 at the mean hotel price) for hotels located within 0.25 miles of the Las Vegas Strip compared to hotels beyond 0.75 miles of the Strip. They estimate a Center-of-Strip premium of 70.23% (US$186.61 at the mean hotel price) for hotels located within 0.75 miles, 36.89% (US$98.01) for the next 0.75 miles, and 18.89% (US$50.18) for the next 0.75 miles, compared to hotels beyond 2.25 miles.
... However, there has not been much research on the relationship between prices and the online reputation of accommodations, measured in different ways (e.g., quality of service, value, and added value). The research on prices in tourism has focused on analyzing different aspects, such as price asymmetry (Lee and Jang 2013), the identification of factors influencing price evolution (Lee 2011), the effect of discounts (Croes and Semrad 2012;Blal and Graf 2013), dynamic pricing strategies (Abrate et al. 2012), the impact of oil prices on tourism (Lennox 2012), the relationship between hotel room prices and location (Zhang et al. 2011), the impact of advertising on pricing and profit in the tourism supply chain (Jena and Jog 2017), the relationships with the category of lodgings (Israeli 2012;Tanford et al. 2012), price elasticity of the lodging demand depending on advertising (Chen et al. 2015), customers' price perceptions (Kleinsasser and Wagner 2011;Masiero and Nicolau 2012b), pricing determinants in hotels (Hung et al. 2010;Espinet et al. 2003), the competitive positioning of lodgings (Rodríguez-Díaz et al. 2015, 2018, the importance of price in hotel selection (Lockyer 2005), and the relationship between the room rate and lodging performance (Qu et al. 2002;Enz et al. 2009;Ye et al. 2009;Chen et al. 2011;Noone et al. 2011;Chen and Chang 2012;Xie et al. 2014). Jena and Jog (2017) regard the seasonality of tourist markets as a decisive factor in the price variable. ...
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Currently, lodgings’ competitiveness depends on pricing, based on the online reputation measured by quantitative scales of variables. The purpose of this article is to analyze the different prices set by lodgings by season in relation to the variables that measure their online reputation. This is an essential aspect in determining prices competitively in a constantly changing market. The study analyzes the offer of three tourist destinations (Gran Canaria and Tenerife in Spain and Agadir in Morocco) and online customer reviews on the quality of service, value, and added value obtained from Booking.com. Bivariate regressions with different functions were carried out to determine which one best matches these variables to the prices. The results show that added value has the greater relationship with prices. The cubic and quadratic functions have the best fit between quality of service and added value with regard to lodging prices. Based on the results obtained, it is possible to determine the most competitive prices lodgings can set depending on the quality of service and the added value offered to customers. To the extent that destinations from different countries are analyzed, the research reaches an international scope that is in line with the competitive reality of the tourism market.
... The literature on the various determinants of profitability of hotels include studies on price [13]; the socio-economic status of guests [14,15]; the quality of the service [16], the existence of competitors [17]; culinary innovation [18]; internal behaviors and dominant values in the organizational structure [19]; the accommodation capacity and the risk of underutilization of the rooms [20]. An example of recent studies focusing on hotels' financial performance is a study [8] that analyzes the impact of service innovations on firm performance in the hospitality industry in Croatia during 2012-2014. ...
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The importance of tourism, the criticality of the hospitality industry to employment and economic growth and the relationship between High-Growth Hotels (HGHs) and regional development provide the rationale for this study. This paper analyzes the financial sustainability of HGHs in 2016-2019 and their contribution to employment by NUTs II regions of the Iberian Peninsula. Overall results indicate better performances among HGHs located in the Southwest regions of the Iberian Peninsula, in the capital cities and in the Northeast of Spain. Also, the correlation between the regional incidence of HGHs and the average number of employees appear to confirm the results of previous studies that gazelles are major employers.
... Even if the other elements are fundamentals for improving sales and, consequently, improving profitability, they are related to expenditures (Eddin et al., 2013). Pricing is also the strategy that can be most easily adjusted in response to market changes (Chen and Chang, 2012). ...
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Purpose: Price has an important influence on consumers’ purchasing decision and consequently in firms’ revenues and profitability. This paper aims to study customers’ price sensitivity of three and five-star hotels. Methodology: Data was gathered through an ad hoc questionnaire. The Van Westendorp Price Sensitivity Meter (PSM) was applied in order to estimate customers’ price sensitivity. Findings: Results show what is the optimal price both to three and five-star hotels. Research limitations/implications: The size of the sample could be higher. It would be important to know what characteristics and services customers value most in the hospitality industry in order to better understand what factors influence price sensitivity. This research may be important to managers understand how customers of three and five-stars hotels react to price changes. Practical implications: Findings help managers to structure effective prices and understand how they can increase or decrease their prices in order to generate more profits.
... Price discrimination is a strategy of charging different prices in different channels that result in price dispersion (Kim, Cho, Kim, & Shin, 2014;Yang et al., 2019). Price discrimination is a key tool for hotels to help them control uncertain demand (Chen & Chang, 2012;Chen, Chang, & Langelett, 2014) or successfully manage their channels (Kim et al., 2014). Price dispersion can be approached from two angles, by channel and by time. ...
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... Tourism prices have been analysed in relation to different perspectives, such as pricing strategy and discounts [22,[49][50][51][52], category [19,20], advertising [53,54], customer perceptions [55,56], key factors [17,[57][58][59], performance [31,40,46,[60][61][62][63], competitive positioning [11,13] and clients' selection of lodgings [33]. ...
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... While empirical studies on the pass-through of EPR, particularly crude oil price to domestic prices, gasoline and natural gas have flourished (see Asghar & Naveed, 2015;Atil, Lahiani, & Nguyen, 2014;Borenstein, Bushnell, & Stoft, 1997;Chen, 2009;Hooker, 2002;Mork & Hall, 1980;Sek, 2017), there is no empirical study, to the best of our knowledge that investigate the pass-through of EPR and tourism to RHPR. Chen and Chang (2012) investigated the effect of price instability on hotel profitability using the Tisdell's model. The study found that price instability reduced hotel profitability through its negative and statistically significant effect. ...
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I. The concentration-profits hypothesis, 294. — II. Industry definition, measure of concentration, and selection of sample, 297. — III. Character and limitations of profit data, 305. — IV. Calculation of accounting profit rates, 310. — V. Association of industry profit rates and concentration, 311. — VI. Association of firm profit rates and industry concentration, 317. — VII. Association of profit rates with other determinants, 321. — VIII. Summary, 323. Copyright, 1951, by the President and Fellows of Harvard College.
Given the increasingly competitive nature of the international hotel industry, understanding sources of competitive advantage is likely to become a critical management task in the 1990s. A framework for practising managers is presented within which to examine the link between the hotel's resources and sustained competitive advantage, using anecdotal evidence from the international hotel industry. Three indicators that have the potential to generate durable advantages - value, irreversibility, and inimitability – are discussed. The framework is applied to one major set of resources: organisational capability.
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Prior work has shown an association between diversification strategy and profitability. This paper replicates that association using more recent and complete data and goes on to investigate the sources of the association. Theoretical arguments are advanced which predict the association which will remain once the effects of varying industry profitability are removed. Empirical tests verify this prediction and permit the discrimination between the effects of industry and diversification strategy on profitability.
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This paper adopts Hsiao (1986) panel data techniques, with metropolitan-level panel data from Taiwan, to examine how the market structures of various related service markets and hotels’ locations affect hotels’ profitability. The empirical results indicate that: (1) market concentration in rooms could significantly improve international tourist hotels’ profitability, while concentration in the food and beverage markets have positive but insignificant effects, and (2) the locations of the international tourist hotels significantly affect their profitability.
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In the face of a highly competitive environment, it has long been considered important for a hotel to formulate a marketing competition strategy, strengthen corporate operations and upgrade quality of service. In formulating competition strategies, one must first measure the comparative performance of the entire industry, before one may understand one’s advantages and disadvantages. This paper uses data envelopment analysis (DEA), developed by Charnes et al. (Eur.J. Oper. Res. 2(6) (1978) 429), and the Malmquist productivity index expressed by Färe et al. (J. Product Anal. 3(1) (1992) 85), to measure the managerial performance of 45 hotels in 1998 and the efficiency change of 45 Hotels from 1994 to 1998. The results revealed that there was a significant difference in efficiency change due to difference in sources of customers and management styles. In addition, this paper showed that the managerial efficiency of international tourist hotels in Taiwan is related to the level of internationalization of hotels. Moreover, the entire industry can be partitioned into six clusters based on relative managerial efficiency and efficiency change. Effective management strategies are developed specifically to each of the six clusters of hotel. It was expected this study can provide useful information for future hotel management needs.
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We consider a problem for hotel room allocations with early discount, cancellations and overbooking. In our model, customers can book a room in discounted price if they reserve before a certain deadline. The model takes overbooking into account. We have expressed the expected total sale function, proved it is unimodal on the number of allocated rooms for early discount and for overbooking, respectively, under a condition and clarified the range where the optimal solution exists. We have derived an optimal allocation for early discount in a specified model without cancellations and overbooking.
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This paper analyses the cost efficiency of Taiwan's international tourist hotel sector. A stochastic cost frontier function with three inputs (i.e. labor, food and beverage, and materials) and one output as the total revenue is specified and used to estimate hotel efficiency. The results reveal that hotels in Taiwan are on average operating at 80% efficiency. In addition, the factor of operation type significantly affects hotel efficiency, whereby the efficiency of chain hotels is higher than that of independent hotels.
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The primary objective of this study was to investigate the effect of a diversification strategy by hotel companies on corporate financial performance and stability. Using 36 publicly traded hotel companies, this study analyzed the differences in financial performance and stability between market-diversified and undiversified hotel companies. Accounting measures, market measure, and risk-adjusted performance measure were employed to gauge financial performance. The results of this study indicated that diversification strategy does not provide profit growth, but diversification partly improves the stability of performance. This study supported the nature of the trade-off between financial performance and stability in the company diversification, and also implied that the market diversification strategy by hotel companies does not function as a means to improve financial performance.
Fixed Effects Regression Methods For Longitudinal DataRelation of profit rate to industry concentration: American manufacturing
  • P D Allison
  • Sas Institute Inc
  • Cary
  • Usa Nc
  • J S Bain
Allison, P.D. (2005), Fixed Effects Regression Methods For Longitudinal Data, SAS Institute Inc., Cary, NC, USA. Bain, J.S. (1951), 'Relation of profit rate to industry concentration: American manufacturing, 1936– 1940', Quarterly Journal of Economics, Vol 65, pp 293–324.
Barriers to EntryAn empirical analysis of oligopolistic hotel pricing: the case of Bermuda Resort Hotels
  • J S Bain
  • Ma Cambridge
  • T Baum
  • R Mudambi
Bain, J.S. (1956), Barriers to Entry, Harvard University Press, Cambridge, MA. Baum, T., and Mudambi, R. (1995), 'An empirical analysis of oligopolistic hotel pricing: the case of Bermuda Resort Hotels', Annuals of Tourism Research, Vol, 22, No 3, pp 501–506.
Econometric Analysis
  • W H Greene
Greene, W.H. (2011), Econometric Analysis, 7th edn, Prentice Hall, Upper Saddle River, NJ.