Living Economics

Get in Where You Fit in
Ira Richardson
Quoting room rates according to the guest's elasticity of demand improves the bottom line when there is surplus capacity.

Recently I began working for a limited service hotel here in Memphis. We have 126 rooms, offer free continental breakfast, free local calls, and we are very centrally located. We have a variety of rates depending on reason of travel. Our rates can be as high as $83.00 or as low as $62.00 per night. When I was trained on quoting rates, I was told to always ask the nature of the travel, tell of four value points about the hotel, and quote the highest rate. If the guest declines or asks for lower rates I can tell them about our Senior discount, or our AAA discount. I can then tell them about our hospital rate. The rates are always available at the same times. The sales manager is very adamant that we do not instantly quote the lowest rate.

By quoting the highest rate first we were renting rooms based on the guests' reservation price, or the maximum a customer is willing to pay for a good or service. If the rate we quote first is okay to them we don't tell them it could be cheaper. On a night when the area rooms are full the first quote is usually accepted, reservation prices are higher. If a guest is not willing to pay $83.00 for a room they often will ask if we can "do better". This is when we go through our rates. It is like a negotiation. Our lowest rate is $62.00 for people traveling to go to the nearby hospital. They usually aren't wealthy and have low reservation prices.

Vacant rooms are perishable goods that bring in zero revenue to cover the fixed cost of running the hotel. As long as the room rates quoted exceed the variable cost of renting the room, renting surplus rooms would increase net revenue. Thus, quoting room rates according to the guest's elasticity of demand makes sense when there is surplus capacity. And that is what price discrimination is all about.

Note:
  1. Ira Richardson is an undergraduate at the University of Memphis.
  2. Ira Richardson is an undergraduate at the University of Memphis.
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