The effect of Airbnb and business cycle on the price elasticity of demand in the hotel industry

Abstract

This paper empirically studied how Airbnb supply and business cycles affected the price elasticity of room demand (PED) in the hotel industry. Economic theory points out that demand becomes more elastic as there exist more close substitutes in the market. Moreover, market elasticities can vary either procyclically or countercyclically across the business cycles. Using monthly operation data of Taipei's international tourist hotels (ITHs) from 2009 (debut of Airbnb in Taipei) to 2016 and exploiting a Markov regime-switching model, this study finds that total listings of Airbnb were positively associated with PED during the peaks (i.e. high price elasticity of demand). Thus, the Airbnb supply posed a substitution threat to the hotel industry in Taipei. For the effect of business cycles, this study found that elasticities of room demand exhibited a countercyclical nature in the Taipei ITH market.

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