An investigation of pricing and profitability in the short-stay accommodation industry in Tasmania

Accommodation providers worldwide are readily observed to adopt a variety of pricing strategies. However there has not previously been an academic study of pricing in the Tasmanian industry. This thesis aims to provide a systematic study of the decisions made by short-stay accommodation providers in Tasmania, and the implications of these decisions on their profitability. Information on the Tasmanian short-stay accommodation industry was obtained from a survey of firms in this industry using a questionnaire designed by the researcher. The use of this method generates a novel data set, one that provides a broad overview of the practices in the industry. Data that would otherwise not be observable were obtained. Notably, innovations in the design of the questionnaire allowed the investigator to directly identify the elasticity of demand in sub-markets. Cost variables are likewise identified. Data generated by the survey allow the following three analyses to be conducted: 1. The survey data reveal that firms in the short-stay accommodation industry use direct price discrimination by assessing the price sensitivity of groups of customers. These groups are identifiable by the firm and are based on the booking process chosen by the customer, whether they are a corporate or leisure customer and whether they are a repeat or first-visit customer. This result provides evidence that firms use third degree price discrimination in practice. 2. An analysis of the determinants of the firm's elasticity of demand is conducted. It is found that increases in the star rating (quality) of the firm reduces the elasticity of demand and an increase in the competitiveness of the environment in which the firm operates increases the elasticity of demand. 3. An analysis of the determinants of firm profitability is conducted. The analysis reveals that the use of the website Wotif.com by the firms is an important determinant of profitability in this industry. However the star rating of the firm, whether or not it is the winter season, and the proportion of customers who make their bookings at the door are also found to be key determinants of profitability. The conclusions from this study are of practical as well as academic interest. As with many regional areas, the short-stay accommodation industry in Tasmania is an important component of the local economy. Firms' pricing decisions will be an important determinant of their profitability. The success of these firms is of interest to their local communities and policy makers. The findings of this thesis are thus useful in informing policy discussion and analysis.