July 01, 2017
Airbnb’s Effect on Hotels Fluctuates with Location, Season, Quality
There can be little doubt that the rise in popularity of the short-term rental site Airbnb has disrupted the hotel industry. With mottos that encourage users to “experience a city like a local” and suggesting that you “don’t go there — live there,” Airbnb provides a platform that draws visitors out of hotel rooms and into privately owned living rooms.
Does this phenomenon signal a rocky future for the hotel industry? Not necessarily, say Hui Li, assistant professor of marketing, and Kannan Srinivasan, H.J. Heinz II Professor of Management, Marketing and Information Systems, who paired up on a study examining both the short- and long-term impact of Airbnb on consumer demand for hotels.
Using seven years of data for hotels and two for Airbnb, the research presents a theoretical model and estimates an empirical model to illustrate how the site’s impact depends on intrinsic market differences such as hotel prices, hotel quality and seasonality, and why high-end hotels might in the long-term benefit from Airbnb’s presence.
The travel industry experiences strong seasonality for demand. Hotels’ seasonal pricing dampens demand by 14 percent, according to the study, while Airbnb’s seasonal supply amplifies demand and recovers 77 percent of that loss. But Airbnb’s impact is felt most by less expensive hotels because both target the same customer: the budget-conscious traveler. Business travelers, who worry less about expenses, tend to gravitate toward high-end hotels. The study found that Airbnb’s most significant impact was felt in cities with stronger seasonal demand, less expensive high-end hotels, low-quality inexpensive hotels and a higher rate of leisure travelers.
However, while leisure travelers cannibalize hotel sales more, they also create greater market expansion for the industry. In the long run, high-end hotels can benefit if Airbnb drives out low-end competitors — yet the end result hinges on whether Airbnb can successfully attract more business travelers. In July 2015, the site launched its “Business Travel Ready” program, which could further disrupt the industry. Li and Srinivasan find that if “Business Travel Ready” rooms on Airbnb continue to grow and successfully attract business travelers, high-end hotels would be hurt the most in the long run. They also suggest that hotels rethink conventional wisdom and consider dumping the seasonal pricing strategy, given that the flexible-capacity accommodation provider may have changed how the industry responds to seasonal demand in a fundamental way.
Li also notes that the model used in the study can predict, based on the attributes of a proposed new market, how much impact Airbnb will have.
The study was conducted even as a spate of new laws and restrictions appeared in cities around the country hoping to minimize the consequences of Airbnb’s presence on hotels. Li says those regulations do not rely on data that tells a different story: that when one group is negatively affected by disruption, someone else besides Airbnb benefits.
“Lots of debates are not empirically based,” she says, but adds, “You always want to look at both sides.”
Read more in the summer 2017 Tepper Magazine.