Date posted: October 22, 2008

The Economics of Hotel Prices

The primary determinants of hotel room rates are location and room size. Of course the more expensive hotels do their best to hide this by furnishing the room with flatscreen tv's, a welcome chocolate and whole lists of amenities most people won't use anyway. These are but small investments. The real price determinant is real estate divided by the number of rooms.

On a recent trip by some mistake my room hadn't been booked for my entire stay even though a reservation had been made for me. Unfortunately due to some major sporting event the hotel was full on the day of my arrival so I was adviced to transfer to the hotel next door, which was owned by the same group. So I stayed there for one night and the next day moved to the hotel that had been booked for me. For all I cared I could just as well have stayed in the first hotel, since moving was actually more of a hassle.

The first hotel I stayed in had 3 stars, the second had 4 stars. The main difference between the two hotels was room size, which in the second hotel was pretty grand. Furniture in the 4 star hotel was a little more luxurious and newer. It had a big flatscreen, where the 3 star hotel had an old television and a small seating area where the 3 star hotel only had a desk and a chair. There was also more choice at breakfast. But those were about the main differences.

While I can't offer any statistical evidence my guess from having browsed tripadvisor to find a decent hotel in cities around the world, is that there is a far greater price variability among 4 star hotels than among 2 star hotels, with 3 star hotels somewhere in-between.

The brand name of international hotel chains such as Marriott, Mercure, Hilton, InterContinental, Renaissance and so on serves as a signal of quality to international travelers, which is why they generally charge higher rates than local hotels in the same segment. By the same token local hotels have to offer more for less to compete with international chains. This is why I generally stay in local hotels.

Hotel prices tend to be sticky, they don't adjust to changes in supply and demand as quickly as say stock prices. With one exception: in cities that host major fairs such as Frankfurt prices more than double during the time of a fair or convention. It happened to me once in Frankfurt. My room rate quadrupled, going from around 60 euro per night to more than 200. So I changed to a hotel outside of the city centre.

There's also some variability between weekday and weekend rates. Hotels that serve business travelers often have good weekend rates. By contrast most people visit Las Vegas over the weekend so if you are looking for a good hotel deal and don't care much for the presence or lack thereof of other people you should go on a weekday. And of course now with the economic downturn you may be able to find some good deals in many more cities.