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Upscale Hotels' Concern: Sleeping With The Enemy
Subject Price and Income Elasticity of Demand
Topic Elasticity
Key Words Slowdowns, Expenses, Accounts
News Story

The weakness in the economy is causing many business travelers to stay at less-expensive hotels. For example, one company is planning to have employees stay at three-star hotels instead of four-star hotels, resulting in savings of $75 to $100 a day per person. In economic slowdowns, travel and entertainment are often the first expenses to be scrutinized very closely.

Many managers are reporting that they can do their business just as effectively at a lower-rated hotel. Part of the reason may be that some mid-priced hotel chains are adding business amenities such as larger desks, refrigerators and complimentary newspapers. In response, some upscale hotels are adding complimentary breakfast, free transportation, and stable prices, especially for those who are considering shifting accounts to cheaper chains.

As a result, Wingate Inn and Best Western are reporting higher occupancy rates. At the top end, Ritz-Carlton claims it has not lost any corporate accounts but customers are taking fewer and shorter trips.

(Updated May 1, 2001)

Questions
1. a) Would you say that the demand for stays at up-scale hotels is price elastic or inelastic?
b) Justify your position with reference to the determinants of the price elasticity of demand and the facts mentioned in the news story.
2. Travel is often one of the first things to be curtailed when a company's revenues decline.
a) What does this imply about the income elasticity of demand for corporate travel?
b) How would you explain this degree of elasticity?
Source Salina Kahn, "Business travelers switch to less-expensive hotels," USA Today, March 19, 2001.

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