Topic3_Part1_Consumption_Theory.pdf

Hospitality Economics and Disruptive Business Models Unit 3 Part I Krisztina Soreg, Ph.D. Table of Contents Unit 3 – Consumption Theory Section 1: Consumer Demand Introduction Welfare Economics → What is Consumer Demand? → Willingness to Pay Question: How can we estimate and monitor the willingness...

Hospitality Economics and Disruptive Business Models Unit 3 Part I Krisztina Soreg, Ph.D. Table of Contents Unit 3 – Consumption Theory Section 1: Consumer Demand Introduction Welfare Economics → What is Consumer Demand? → Willingness to Pay Question: How can we estimate and monitor the willingness to pay of our potential buyers? Consumer Demand Tracking willingness to pay for Amazon Prime by customers’ annual salary Let’s see an example! The 3 Pillars of Consumer Demand Utility Total Utility Marginal Utility Understanding utility Budget constraints Budget constraints in practice Indifference curves → How do consumers decide? → Let’s see an example for the substitution effect! Section 2: Elasticity of Consumer Demand What is elasticity? Price Elasticity of Demand Index ticket prices vs consumer price index (CPI) in the US (Jan 2021 = 100) Price Elasticity of Demand How to calculate elasticity? Εp = %𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 %𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 = Ε𝑝 > 1: Elastic Demand Ε𝑝 = 1: Unitary Elastic Demand Ε𝑝 < 1: Inelastic Demand Δ𝑄/𝑄 Δ𝑝/𝑝 Let’s see an example! Price elasticity of demand → → Determinants of Elasticity Necessities versus Luxuries Availability of substitutes Price relative to income → → Global luxury market in billion USD Price elasticity and total revenue → → → “Travel booking behavior has changed substantially over the past two decades. The emergence of new technology and online intermediaries has provided travelers with the flexibility to book up until the date of stay. This has created a fast-paced, dynamic booking environment that disrupts traditional revenue management strategies focused on pricing and allocating rooms based on the time of purchase.” Webb, T. D. (2017, November 17). The Booking Window Evolution and its Impact on Hotel Revenue Management Forecasting. VTechWorks Home. https://vtechworks.lib.vt.edu/bitstream/handle/10919/90789 /Webb_TD_D_2018.pdf?sequence=1&isAllowed=y What can influence price elasticity in the hospitality industry? Contact