Price and its Effect in Shaping the Competitive Ability of Hotels - Essay Example

Number Subject Name Lecturer’s Name Business Due date Date Submitted Contents Introduction 2 Supply and demand 3 Demand 3 Supply 4 Prices 4 Elasticity 5 Externality 5 Tax burden 6 Current trends in the hotel industry 6 References 8 Introduction The hotel industry is a competitive one. Like any other economic venture, the factors of supply and demand apply in shaping the prices in the hotel industry. Besides the economic forces shaping the prices as will be discussed, there are other forces that come in and alter the prices in the hotel industry. Considering the fact that the guests in hotels will always consider what is affordable to them, the hotels are faced with an added burden of ensuring that they offer competitive prices in order to outdo their counterparts. The increase in new entrants in the market has resulted in each hotel trying to scoop a share of the market. This is not always easy since some factors play a part in driving the prices higher than the hotel operators may expect as will be discussed below. Factors affecting prices in the hotel industry Supply and demand In economics, there are two major forces that are involved. The two forces are related to each other, in that, they affect the prices of commodities or even the services offered. The rule is that when there is an increase in demand, there is an expected increase in prices if all the other factors remain constant. It follows also that when there is an increase in the supply, ceteris Paribas, the prices of the commodity in question will go down. It is therefore the norm that the buyers have the power to change the prices of commodities with the changes in their need for specific commodities. It is not much different in the hotel industry on the dynamism of supply and demand, only that in this case, there is no commodity in question but rather, the services offered by the hotels including food, accommodation and any other related service that a hotel may offer. These two factors ensure that the prices in the hotel industry are at certain range. It is upon the hotel operators to look for ways of offering much more at lower prices. Fig 1 relationship between changes in supply and demand Demand The hotel industry is mostly driven the demand for the services offered. The services may be required by the locals in their day to day activities or even tourists who may be in need of such services. This demand is in simple terms, the availability of customers who are in need of the various services that the hotels may offer including food and accommodation. There are many factors that have led to a great demand for the hotel industry. Some of such factors include changes in the social as well as economic factors and also to some extent, demographic factors. Economic factors include the increase in the mid income earners and wealth distribution while the demographic factors relate to an increase in the population hence causing an increase in the demand for hotel services. Furthermore, the social changes such as an increase in the number of women forming part of the working class have also contributed to the increase in the demand for hotel services. Supply The supply in the hotel industry relates to the availability of hotels. This aspect is indicated by the number of hotels available per locality (Allan & Jamie 2011). The supply in the hotel industry has been informed by the rising demand caused by available customers requiring hotel services (Price water House Coopers 2009). The prices as will be seen in the next discussion affect the amounts charged by hotels. Prices Apart from the supply and demand that affects the prices of hotels, there are other factors that may affect the prices of services offered at hotels such as tax. However, the dormant factors are supply and demand. The demand sometimes may be short term especially that which is associated with special events that may cause the number of customers requiring hotel services to increase. In Australia, one such event is the Olympics in 2000 which led to a great increase in the price per room in hotels (Jonas 2014). Fig 2. Relationship between supply and prices of hotel prices. Elasticity Elasticity is the ease with which the market forces are able to change depending on the changes in the environment or a change in one of the factors. Price elasticity of demand refers to the flexibility of the prices given a change in the demand (Moffatt 2013). When the demand for the hotels goes down, it is also anticipated that the prices for the hotel services will also go down. On the hand, price elasticity of supply refers to the ability of prices to change given a change in the supply. The increase in the number of hotels should result to a decrease in the prices for services offered in hotels and hence increasing price competiveness among the hotels. Externality These are activities arising from parties other than the customers or the hotel service providers. These factors have a tendency of affecting the hotel industry, especially, the prices. They are externalities because they do not arise from the main players but rather, are activities that are done by third parties but causing effects on the hotel industry. Some of these activities may be negative while some may be positive. Negative externalities affect the hotel industry negatively. A good example here is the carbon tax imposed on any accommodation facilities which include hotels in this case. The carbon tax was introduced by a third party, which is the government. The effects are adverse in the industry both the hotel and the customers. The tax ends up altering the prices of hotel rooms, while in perfect economy, only supply and demand would affect the prices. An example of a positive externality would be when the government offers to host a certain international event. In its face, the offer does is not meant to affect the hotel industry but the results are that the persons visiting will need to use hotel services hence, increasing the demand for hotel services. An example here is the Olympic Games held in Sydney in the year 2000. Tax burden The hotel industry has been known to offer both catering services and accommodation to their guests. It is therefore no doubt that the introduction of carbon tax is affecting the hotel industry to great extent. The tax has an effect of cutting down up to 12% of the profits of the hotel (Tourism Accommodation Australia 2013). The tax has resulted to a further increase in hotel prices with the owners trying to cut down the huge cost placed on their backs. The tax therefore translates to higher room prices since the tax is meant for any business offering accommodation services. The tax burden is eventually borne by the customers who have to pay a higher amount of money for the accommodation (Restaurant & Catering Australia 2015). The tax burden in relation to the prices per room is in the short run, an expense borne by the customers In the long run however, the hotels are the ones that suffer as a result of the carbon tax. The reason is that the customers will reduce due to the increased costs of hotel services. That in the long run affects the hotel since it relies on the number of guests visiting and booking the hotel rooms. When they can’t do so, then the major blow is felt by the hotel owners. Looking at it from an investment point of view, the tax may even affect the future of hotel industry by reducing the number of investors opting to go for an investment in the hotel industry. Considering the contribution of the hotels business to the economy, the economy will end up being affected also. This carbon tax has been found to be the world’s highest carbon tax. Looking at the costs associated with the tax, it is likely that the industry may be crippled by such high amounts, making it very hard for hotels to offer low prices to their customers. Their ability to compete in terms of prices is therefore affected to a great extent. Current trends in the hotel industry To gain ground in the market, the hotels are investing large sums of money introducing latest technology in their services. The booking of hotel rooms of table reservations is made to be very simple, mostly by a click of a button. The technology is meant to make sure that the customers are attracted to the easy way of booking rooms and reserving tables in the hotels (McDonald 2010). The aim should be to make the customer’s work as easy as possible by cutting down long manual procedures which at times end up increasing the customer’s expenses. Technology is also meant to ensure the comfort the customers by ensuring that the rooms are highly automated. Despite many cities in the world offering free internet, the hotels are ensuring that there is available reliable free internet for their visitors. It is also a growing trend that the hotels must ensure that they have ample parking spaces for their guests. All these efforts are aimed at ensuring that the guests get the best of treatment, hence attracting more to the hotels offering the best. These services are usually rendered without raising the prices of the hotel services. It is not unusual to find hotels being built near beautiful sceneries (Deloite 2015). These sceneries serves to attract more guests since they usually do not pay an extra amount to see these beautiful sceneries. References Deloite 2015, Tourism and Hotel Market Outlook 2015 available from Jonas, L 2014, Sydney Hotels Supply & Demand Study available from < http://sydneyyoursay.com.au/visitor-accommodation-draft-action-plan/documents/18971/download> McDonald, M 2010, Power shift, What happen when consumers drive technology markets, Gartner available from Moffatt, M 2013, Price Elasticity of Demand, About.com Economics available from . Price water House Coopers 2009, The Australian Hotels Industry available from < http://aha.org.au/wp-content/uploads/2011/04/PWC-Hotel-Industry-Report-20092.pdf> Restaurant & Catering Australia 2015, Re:think :Response to the tax discussion paper available from < http://rca.asn.au/rca/wp-content/uploads/2014/12/SUB_FED_FINAL_RethinkTax_2015.pdf> Tourism Accommodation Australia 2013, The Carbon Tax and Australia’s Accommodation Industry: Tourism Accommodation Australia. Available fromwww.tourismaccommodation.com.au Allan,w & Jamie, L 2011, Hotel supply: Where are we in the cycle? Read More