Price Discrimination In Hotel Industry

When determining the type of market in which certain goods are sold, there are couple main points to think about: are there many competitors, are the goods homogeneous or heterogeneous and is there free entry and exit in the long run? In our case, there are a lot of sellers in the market, more than 200. Goods, even though can seem to be similar, are heterogeneous. Hotels can differ by location, room quality, size, skill of employees, entertainment, outdoor activities and so on. Also, there is free entry and exit to and out of the market. Considering all these factors, we can clearly say that hotels belong to monopolistic competition. Hotels are price makers, meaning that there is not one market price, at which all the suppliers have to sell

This is extremely popular in the hotel industry. In this chapter we will overview these techniques. Let’s start with the second degree price discrimination. In theory, the second degree price discrimination is referred to quantity discounts and occurs when different prices are set for different quantities of the same goods, for example buying a 6-pack of Coca-Cola cans will cost less than buying 6 Coca-Cola cans separately. However, in reality, second degree price discrimination takes place not necessarily by adjusting the quantity of the good, but also the quality of the good. In the case of hotels, suppliers create different consumer segments, we can relate to them as lower-end consumers, and higher-end consumers. Obviously, hotels cannot set the price that higher-end consumers are willing to pay, because all lower-end consumers will not be able to afford the good. Inversely, if hotels set the price that lower-end consumers are willing to pay, higher-end consumers gain huge consumer surplus, thus lowering the profit for the suppliers. In order to take the consumer surplus, hotels keep lower prices for some rooms in order to target lower-end consumers and offer some higher quality rooms (for example presidential suits) to target higher-end consumers. The difference in revenues providing different rooms and the same ones is seen below. This strategy is called versioning, or

In theory, the third degree price discrimination occurs when different customers pay different prices for the same goods, but each unit sold to a given group costs the same. This actually occurs in three different ways. First of all, most hotels offer discounts for children or seniors. This is done because the demand of these customer groups is more elastic. An explanation for this is simple: seniors usually have less income than adults, therefore a stay in the hotel takes up a larger share of seniors’ budget, meaning that they might not choose to purchase the good for a high price, which is affordable for adults with higher incomes. In short, lower prices are offered to consumers, who might not be able to afford a higher price, thus attracting more visitors and raising the profits. Let’s take a look at the graph below. Output is Y number of hotel rooms booked at price P. D1 is demanded by adults, D2 – by seniors. If suppliers charge price P1 for all the rooms, they are only targeting one segment and quantity sold will be Y1. However, by charging a different price P2 to different customers, suppliers now target two segments, so the total revenue will now be P1*Y1+P2*Y2, which is obviously a better option for suppliers than just