By most estimates, the economic impact of tourism is huge. According to Euromonitor, average tourist spending in 1996 was US$559 per person and even that figure is expected to grow by 8% per year till 2000. The World Travel and Tourism Council (as quoted in The Economist 1998) estimates that the total 1996 economic value of goods and services attributable to tourism was 10.6% of the gross global product. The importance of tourism as an area of academic investigation stems from the large contribution that it makes to the national income of several countries and the potential that it offers for generating output and employment growth.

The study of tourism involves two aspects. First, there is the growth in demand, reflected both in continually rising arrivals and also in the increasing amounts spent, on average, by tourists. The study of demand side issues occupies an important place in the tourism literature (Gonzalez; Smeral; Song; Witt; Witt and White). The second aspect relates to the growth in infrastructure to cope with rising demand. The capacity for buoyant and rising tourist numbers to generate higher incomes and employment in the host country depends critically upon how the supply of infrastructure responds to this demand. In the presence of capacity bottlenecks, demand increases will result in price rises and there will not be any concomitant output and employment increases. The greater the investment in expanding capacity, the more will demand growth translate into output and employment growth.

Infrastructure relevant to tourism takes a variety of forms. There is the question of transporting tourists to their destination and, once they are there, of providing them with the means to move about. Probably nothing has changed the face of tourism (making even the furthest-off place accessible) than inexpensive air-travel. In part this has been the result of deregulation, which has spawned, in both Europe and the United States, affordable “no-frills” airlines; in part, the cause has been airline partnerships (such as KLM-Northwest and United-Lufthansa) which allow the partners to reap economies of scale by sharing facilities. A parallel development has been the linking of car rental firms to air transportation so that passengers with a particular airline receive favorable rates from the car firm(s) with which it is linked.

Then there is the question of providing tourists with activities when they are at their destination. The provision of restaurants, shops, amusements, and culture, along with access to places of natural beauty and/or cultural importance, are some of the components of such infrastructure. Harrison (1997), for example, investigated the relationship between museums and tourism and concluded that the strongest attribute of a museum, in the eyes of tourists, was the fact that it was truly “local”.

There is still the question of providing beds for tourists, and it is with this aspect that the present paper is concerned. The provision of accommodation is an important part of the totality of activities that go to make up the tourism industry. For example, Zhou, Yanagida, Chakravorty and Leung (1997) showed, using a computable general-equilibrium model, that the industries that would be most affected by a 10% reduction in tourism demand, in terms of a reduction in factor demand from base, were hotels (?9.7%), restaurants and bars (?8.3%), and transportation (?7.3%). Earlier studies of the hotel sectors have been provided by Lundberg, Krishnamoorthy and Stavenga (1995) who detailed the different types of hotels, their financial and organizational structure, and their operating methods; by van Kraay (1993), who, in an analysis of the hotel and catering sectors in the European Union, was concerned with the measures adopted by the European Commission to assist these industries; by Smith (1995); and by Zimmerman, F.M., 1995. Tourism in Austria: Instability of Demand and Innovations on the Supply Side. Geographische Rundschau 47, pp. 30–37. View Record in Scopus | Cited By in Scopus (2)Zimmerman (1995). This paper complements these studies by focusing on the econometric analysis of supply responses in the hotel sector. It attempts to estimate the supply of guest rooms by relating supply decisions to price and to other, non-price, factors.

Hotel room supply

The analytical framework for estimating the supply-curve of the hotel sector, and the results from applying this framework to data for each of three tourism regions of Queensland, Australia, are reported in this part, by outlining the analytical framework for the study, by discussing the econometric methodology employed, by describing the data, and by presenting the estimation and inference results. The data for carrying out this study was provided by the Government Statistician’s Office at the Queensland Treasury. The office supplied the author with data, for the quarter one 1986 to quarter four 1994 period, relating to hotels, motels and guest houses (hereafter, collectively referred to as “hotels”) in the Gold Coast, Whitsunday, and Cairns.

The analytical framework

Consider a hotel sector in a particular region that contains K hotels indexed k=1…K. Suppose hotel k has Nkt rooms at the beginning of period t. The price that concerns consumers and, therefore, determines the demand for hotel rooms is xkt, the amount paid per occupied room. On the other hand, the price that concerns suppliers, and thus determines the supply of guest rooms, is wkt, earnings per available room since that represents the rate of return on the hotel’s stock of rooms. In other words, demand and supply decisions with respect to guest rooms are made with reference to different prices. The relation between the “consumer” price and the “producer” price can be seen clearly from the following equation. If Rkt is the revenue of the hotel over period t, earnings per available room, wkt, are:

where: Mkt is the average number of rooms occupied over period t; zkt=Mkt/Nkt is the average occupancy rate of rooms in the hotel in period t and xkt=Rkt/Mkt is average earnings per occupied room.

Interposing between the two prices (wkt and xkt) is a “wedge” represented by zkt, the room occupancy rate. (The idea that zkt acts as a wedge is analogous to the wedge that taxes drive between the labor costs that employers pay and the money that workers take home.) The room occupancy rate may be thought of as the rate of utilization of the hotel’s stock of rooms: when this stock is fully utilized, that is zkt=1, then wkt=xkt; for less than full-utilization of stock, that is zkt<1, wkt<xkt. Following from this are two aspects of hotel behavior: the behavior of individual hotels and the behavior of the sector in its entirety.