Price elasticity of demand and its impact on hotel revenue performance during the COVID-19 pandemic

Abstract

This study investigates price elasticity of demand and its pricing effect on revenue performance of hotels during the COVID-19 pandemic. Using annual operating performance data on over 2,500 hotels from 2018 to 2021, this study provides empirical evidence of a relatively inelastic demand for the lodging sector. Price, income, cross-price, and lagged demand are positive and inelastic in their relationships with demand. Price has a significant and negative effect on lodging demand while a hotel’s competitive position has a significant influence on RevPAR performance with both negatively affected by COVID-19. More important, the results show a significantly greater positive impact of pricing on RevPAR penetration for hotels that raised rates relative to hotels that dropped rates. The findings suggest that it may be best for hotels to maintain or raise room rates to maximize revenue performance in the midst of an external shock.