The Telegraph, July 24, 2012

London 2012 Olympics: hotel prices fall as visitor rush fails to materialize
The cost of a London hotel room during the Olympic Games has dropped sharply, as an expected surge in bookings has failed to materialize.
Rooms which were being offered for an average 210 have now been cut in price to 160, according to one survey. Tourism chiefs confirmed the fall, which comes after Locog, the games organizers, released thousands of unwanted hotel rooms in the capital and hoteliers began to abandon minimum stay rules, allowing tourists to book one or two night stays. The average rate for rooms in London during the main Olympic period of July 27 to August 12 has fallen from 213 to 160 a drop of 24 per cent the new figures will reveal next week.
Detailed NEWS Article source: http://www.telegraph.co.uk/sport/olympics/london2012/9350831/London-2012-Olympics-hotel-prices-fall-as-visitor-rush-fails-to-materialise.html

Introduction: As the Olympic Games have already begun, the realities have come face to face to the parties involved in the organization of the event. The hoteliers are the worst hit. Due to some unaccounted factors, the visitors for the event didnt turn up and thus the hotel industry was hit badly as compared to others. The following report tries to understand the undercurrents of the demand and supply functions, thus analyzing the situation.

Impact of London Olympics on the Supply and Demand Mechanism of the Hotel Industry:
The 17 day long Olympic Games and 12 days long Paralympics Games will create a huge demand for hotel rooms. As many as 294000 spectators were expected to visit London every day. Whereas, the supply of hotel rooms is only about 110000 in the London area, a third of these had already been allotted to the Olympic personnel. Taking the advantage of the situation, the hoteliers were charging as high as 390 % of premium price, which is huge as compared to the typical London hotel price hike of 54%. A diagram can is used here in understanding the concept of Excess Demand:

1 By Saurabh Shah and Shreyas Shirke

As it can be seen in the diagram, the supply of hotel rooms in London is 110000; whereas the demand for the same is expected to be 294000. Hence, this situation has led to an increase in price, which is more than 390%. Here, apart from the limited supply other factors have also contributed to the skyrocketing price hike. But the major factor is the restricted supply here. As per the news article, the outsiders for the games failed to materialize. And the hotels are facing empty hotel rooms, bringing the skyrocketing prices to a downward ride. Because of the decreased demand, the hoteliers had to cut back the prices from 213 to 160, hoping to increase the visitor's footsteps in the city. Here, it is important to note that the decrease in demand is not a result of the high rates of hotel rooms. The factors are external, such as substitutes' availability, competitors' policy, income of the tourists, time element, distance, etc.

Demand function:
Qd = f (P, S, C, I, D)
Qd: Quantity demanded, here hotel rooms demanded P: Price of hotel-room per night S: Substitutes available in the market C: Competitors available in the market I: Income of tourists/visitors D: Distance of the venue from the tourist nation Interpreting the factors one by one: 2 By Saurabh Shah and Shreyas Shirke

Price: As price is the major factor affecting the demand for hotel rooms, a lesser demand induced the suppliers to reduce the price. A 25% decrease in price can be seen in the example given in the article. Substitutes: Meeting the demand of 294000 spectators with 110000 hotel rooms is impossible. And hence, the substitutes like Home rentals, University Dorm rooms, hostels, bed and breakfast joints, road-side motels, etc come into the picture. Competition: The cut in the number of visitors also resulted in price war amongst competitors like Britannia International and London Ealing Hotel. Quote from the article: "The price cuts mean a double room at the four-star Britannia International, at Canary Wharf, will cost 259, compared to previous rates of 395, while a double room at the three-star London Ealing Hotel, on Ealing Common, will cost 121, down from around 150." Income of the tourists/visitors: Most of the outsiders at the event were expected to come from US and Asian countries. An average Asian with a lower per capita income cannot afford the hotel rates charged in London. Hence, the many of the tourists didn't turn up for the event fearing the higher travelling and tourism costs. Distance: Distance of the venues from the tourist countries is also a considerable factor here in deciding the demand for the hotel rooms in the host country. Most of the tourists for the Olympics were coming from US and Asian countries. The distance between these countries is quite high. Thus, this limits the number of tourists coming from these countries.

To understand the relationship between demand and supply of hotel-rooms and the market equilibrium price of hotel-rooms per night, a diagram is shown below:

3 By Saurabh Shah and Shreyas Shirke

Looking at the diagram above, we can see that the factors other than price have shifted the demand curve from D1 to D2. Factors such as availability of substitutes, competitors' pricing strategy, Income of tourists, Distance from the venue, Time element, etc are affecting the demand for hotel rooms in London for Olympic Games at the moment. And the demand curve has shifted downward from its original position. Here, it can be seen that the prices of hotel rooms came down crashing as the demand reduced from 294000 to 180000, due to the other factors. Hence, it's advisable for the hoteliers to decrease the price of hotel rooms from 213 to 160, a 25% decrease in price which can increase the demand substantially. Price Elasticity of demand for Hotel rooms in London: The price elasticity of demand for hotel rooms in London will help to understand the situation better. Hence: Price Elasticity (Ed) = (% Change in Demand)/ (% Change in Price) = ((294000-180000)/ (213-160))*(213/160) Price Elasticity (Ed) = -1.55 (i.e. Ed>1) Managerial Implications: As Price of Elasticity is -1.55 (i.e. Ed >1), the demand is price elastic. Hence, it can be said that 1% increase in price of hotel rooms will result in more than 1 % decrease in demand of hotel rooms. So, as a manager we cannot think of increasing the price of hotel rooms at this point. As discussed above, higher number of spectators coming to London for Olympics led to competition between different hoteliers giving rise to 390% higher price than the previous one. Now as per article we find that these numbers of spectators did not turn up for the event, so as a Manager it is 4 By Saurabh Shah and Shreyas Shirke

advisable to think of attracting the customers thereby increasing the demand. So, we recommend some solutions as given below: Arrangement of Hotel buses or taxis for tourists to get to the Event venues Complimentary Pick up and drop service for tourists who are flying to London or travelling by rail. Charging competitively less price as compared to other Hotels, so that all our hotel rooms are occupied, generating high revenue.

5 By Saurabh Shah and Shreyas Shirke