Since its launch slightly more than a decade ago, Airbnb has become an e-commerce superstar. The company has more than six million listings, and some 500 million people have stayed at one of its properties.
Airbnb has thoroughly disrupted the established lodging industry, particularly hotels, which have struggled to respond.
In a recent study, Poets&Quants’ Professor of the Week, Kannan Srinivasan of the Tepper School of Business at Carnegie Mellon University, analyzed Airbnb’s strengths and weaknesses and suggested some new strategies hotels may adopt in response.
The study, “Competitive Dynamics in the Sharing Economy: An Analysis in the Context of Airbnb and Hotels,” co-authored with Tepper assistant marketing professor Hui Li, was published online in April by the journal Marketing Science.
AIRBNB’S FLEXIBLE CAPACITY
Srinivasan and Li first described the unique structure of the lodging industry. Building hotels is a huge capital investment, so the supply of rooms is pretty fixed, while travel demand is seasonal. That leads to price surges during, say, the Christmas holidays or summer vacations. “Hotels use seasonal pricing to accommodate seasonal demand by charging higher prices during high-demand seasons,” the authors write.
Airbnb, on the other hand, has flexible capacity depending on how many properties are available to rent. If more hosts decide to rent out their homes or apartments through Airbnb during peak demand season, that increase in supply would tamp down prices across the entire market.
“On the supply side, the flexible supply of Airbnb reduces the scarcity of capacity, mitigates hotels’ abilities to extract higher prices during peak seasons, and challenges the conventional wisdom of capacity-driven hotel pricing strategy,” they explain.
HOTELS THAT CATER TO LEISURE TRAVELERS ARE PARTICULARLY VULNERABLE
Since 90% of Airbnb’s customers are leisure travelers, hotels that cater to them are particularly vulnerable, the researchers found, because vacationers tend to be more price-sensitive than business travelers. “Airbnb mildly cannibalizes hotel sales, especially for low-end hotels” and particularly in leisure-oriented markets, they write.
Efforts by local governments—sometimes under pressure from the lodging industry—to restrict Airbnb haven’t had much impact on either Airbnb or the hotels they were supposed to protect. “Imposing stricter regulations on Airbnb that raise the cost of hosting does not help hotel profitability beyond a certain point,” the authors write. On the other hand, Airbnb’s efforts to lower costs to hosts can actually reduce hotels’ profitability, they found.
So, how should hotels respond? Perhaps by changing their business model and abandoning seasonal pricing. “During peak seasons, higher demand provides incentives to raise prices, yet it also drives up Airbnb supply which may reduce competitive prices; in the off-peak seasons, softening demand provides incentives to reduce prices, yet it also reduces Airbnb supply which may increase competitive prices. Therefore, the significant price differences across seasons are more moderated,” they write.
COUNTER-SEASONAL PRICING AT HOTELS COULD HELP THEM COMPETE
“Hotels may benefit from conducting less seasonal pricing and even from considering counter-seasonal pricing when 1) the hotel market share is smaller, 2) Airbnb’s market share is larger, and 3) Airbnb’s supply elasticity is greater,” they concluded.
Airbnb will remain a formidable competitive threat, especially as it aims more at business travelers, which, the researchers wrote, “could have a material impact on hotels, especially high-end hotels, by increasing the vulnerability of high-end hotels to lower Airbnb hosting costs.”
Srinivasan and Li studied Airbnb listing data from August 2014 to October 2015, including detailed information on several different kinds of properties. They also used data on hotels from January 2008 through 2015 compiled by Smith Travel Research, focusing on high-end, mid-range and low-end properties in Los Angeles, San Francisco, Washington, D.C., Miami, Chicago, New Orleans, Austin, and Seattle.
Kannan Srinivasan is the H.J. Heinz II Professor of Management, Marketing and Business technology at the Tepper School of Business, Carnegie Mellon University. He teaches courses on marketing management as well as analytical and structural marketing models. Recently, he has been working in areas such as cloud computing, the sharing economy, and algorithm bias in artificial intelligence
Srinivasan got his BA in engineering from the University of Madras, an MBA in marketing and finance from XLRI, and a Ph.D. in management from UCLA. He has been on the Tepper faculty since 1986 and also has taught at Chicago Booth and Stanford.
Howard R. Gold is a contributing writer to Poets&Quants. He is a columnist for MarketWatch and has written for Forbes, Barron’s, Money and USAToday.