Are we explaining the movement of hotel room rates correctly?

Abstract

Demand function, inverse demand function or market equilibrium condition has been used to estimate the empirical models that explain the movement of hotel room rates. However, hotels generally face excess supply of rooms. This research paper develops a simple theoretical model to link hotel room rates to excess supply of hotel rooms. The annual data of Singapore from 1991 to 2017 is used to test this framework. Due to small sample size, with only 27 observations, the bounds testing approach to cointegration is applied on the annual data of hotel industry in Singapore because the obtained estimators are super-consistent. It is found that average hotel room rate and average hotel occupancy rate are cointegrated to confirm hotel room rates and excess supply of hotel rooms are inversely correlated. In order to avoid model mis-specification, major crises are captured by dummy variables which are treated as fixed regressors in the bounds testing approach to cointegration. The empirical and theoretical frameworks used in this study suggest that when hotel occupancy rate is used as an independent variable in modelling the determination of hotel room rates, a researcher is adopting excess supply framework developed in this paper. Furthermore, this framework teaches students in tourism a simplified way to explain the movement of hotel room rates, while still reminding students about the complexity of hotel industry.

A Comparison of Tourist Arrivals Among Franchised Versus Independent Hotels

“…Montenegro's European commitment, NATO membership, and leading position among non-EU countries from the region and its long tourism tradition, exceptional tourism resources, and international hotel chains make Montenegro an ideal research setting for analyzing the impact of global hotel chains on destination competitiveness and success. Lee (2020) argues that destinations that want to have a vibrant and robust tourism industry that can improve economic health (p. 22) should rely on a growing hotel industry. He further states that inverse demand and demand functions usually use the theory of demand to identify a set of variables as the critical determinants of each indicated function.…”