Both the sale of rooms and assets of a hotel business are considered as a cyclical business. The supply of hotel rooms cannot expand correspondingly within a short period to satisfy the sudden spikes in demand for hotel rooms during the holiday or festive seasons. The hotel managers tend to hike its hotel price unreasonably during festive seasons to maximize their profit and total revenue earned. Recently, hotel rates located in Venice skyrocket by up to approximately 200% when the Venice Carnival is around the corner (hotelsbooking.com).  This phenomenon can be explained by several microeconomics concepts. As microeconomics is mainly focusing on the behavior of an individual household, firms and consumers, or even specific markets such as the market for hotel business (Taylor, J.B., Frost, L. , 2006). When a traveler or tourist wants to buy services as in book or stay in the hotel, an economic interaction occurred between the tourist and the hotel managers in the hotel business industry.

When the celebration of the carnival is near, problems such as inadequate hotel rooms will occur. As many travelers and tourists will be paying a visit to Venice to experience the well-known event.  The total resources for hotels in this case, will be referring to the hotel rooms available for guests are limited. Thus the hotel business industry in Venice cannot produce and satisfy what the tourists’ and travelers’ need. In this case, the hotel managers face limitations on what they are able to produce, this problem is known as scarcity. In general, scarcity is defined as the excess of human wants over what can be produced by a limited amount of resources. Not only the hotel managers face scarcity during peak season, and so do the tourists or travelers.

Hotel Moderno in Venice usually posts it rates at 69 euros. However, when the carnival is near, the identical room is listing its price at 215 euros. This eventually results in a 211.59% of rate increase in hotel price. In such situation, some tourists and travelers will be forced to give up staying in Hotel Moderno as they don’t have enough money to foot the bill. When the consumers don’t have enough resources to complete an economic interaction, scarcity occurred. For those consumers that can’t afford to stay in hotels such as Hotel Moderno, they are left with a few options. They can choose to stay in a least expensive hotel found in the area. Due to their budget constraints they have to make different choices between the items that they desired. For instance, budgeted consumers can go for a 2-star hotel located in Canareggio which costs only 150 euros per night. The process whereby consumers are forced to make decisions between two hotels with different pricing level create opportunity costs. The opportunity cost for tourists or travelers of deciding to stay in Hotel Canareggio, which costs 150 euros per night will be the next best opportunity forgone. Which will be  the chance to stay in Hotel Moderno that costs 215 euros per night in Venice.

It is shocking to see the price gouge among hotels during a festive seasons. There are several reasons that contribute to the increase of price in the hotel business industry in Venice when the carnival is around the corner. One of the main reasons is shortage. The demand of hotel located in Venice will increase as people from around the world don’t want to miss the well-known and awesome carnival. Three conditions determined the how demand occurred. First, the tourists or travelers must have the desire to stay in that certain hotel. Hence, they must have the exact plan to stay in the hotel and has the ability to foot the bill. Wants are unlimited as all tourists wish to enjoy a higher level of satisfaction when it comes to staying in hotels. However, not many can afford to stay even a night in the 5-star hotel, especially in this festive season. The scarcity guarantees that many perhaps most of the tourists wants to stay in a better hotel will not be satisfied. Factors affecting the buying plans will result in a change in demand include, the price of the related goods. For instance, the demand for Hotel Cannareggio will increase as the price of its substitute goods, Hotel Moderno is increasing at an alarming rate.  The demand for Hotel Cannareggio will be affected by Hotel Moderno as both of them can be used in place for another good. Why would people spend more when they can simply replace the goods with another that is relevantly cheaper.

Supply in this case will be referring to the behavior of the hotel managers. It is a relationship between two variables, which are the price of hotel rooms per night and the quantity of the hotel rooms where the hotel managers are willing to sell at that certain price (Taylor, Frost, 2006). The price of the hotel rooms per night and the quantity of the hotel rooms where the hotel managers are willing to sell at a certain price share a positive relationship. As when the price of a hotel room per night goes higher, the hotel manager will be willing to supply more hotel rooms in the market in order to gain revenues and earn profit.  While the supply for both Hotel Moderno and Hotel Cannareggio will reach its maximum level.  If the hotel managers in hotel business industry want to supplies more hotel rooms, they need to have to resources and technology to produce it. In addition, from the extra hotel rooms that they produced, it must be profitable. The hotel managers must have the intention to produce it and willing to allow tourists to book the hotel rooms’ reservation.  Since the Venice Carnival is around the corner, hotel managers will increase the supply of their hotel rooms as much as possible at a higher level of price to maximize their profit.

Suppossingly, under the normal demand and supply curve in non-festive seasons, the market will reach its equilibrium price,  at point e. Since the demand of the hotel rooms increase as a result of the carnival, the demand curve will shift to the left (from  to ), while the supply curve remains the same . At this point, the new equilibrium price in the market is formed, . As the new equilibrium quantity and equilibrium price increase, some tourists tend to withdraw from the hotel business industry as a result not insufficient resource of money. Therefore, shortage will occur as demand for the hotel room is more than the supply of the hotel room under the new equilibrium quantity and price. 

It’s unavoidable that the hotel rooms’ price will hike during the festive seasons. Due to the shocking rise in demand among tourists and travelers, the hotel managers will definitely take this opportunity to increase the price of the hotel rooms. As they know, no matter how high the price they increase to, tourists are still willing to spend their money staying in their hotel as they don’t want to miss this meaningful and well-known event. However, hotel managers can’t increase the supply of the hotel rooms in such a short period of time given. To increase the supply of hotel rooms, it requires time, technology, capital investment, land and labor. Hence, an increase in demand will caused the hotel prices to rise and the equilibrium quantity to increase. Shortage occurred and the price of hotel rooms will decrease to normal rates when the Venice Carnival is over.

All in all, during festive seasons, not only the Venice Carnival but also the annual Cannes Film Festive held recently. This “glamorous” event also result in a 558.44% of increase in the hotel rate. As the hotel price per night increases from 154 euros per night to 1014 euros per night during the film festive. The demand for hotel rooms will increase, a shifting of demand curve to the left while the supply curve remaining the same will result in shortage. As shortage occurred, hotel managers will increase their price for hotel rooms to maximize their profit.

 (1350 words)

Reference list:

·         In vougue. 2013. Cannes Film Festival: Hotel rates skyrocket by up to 500%. [online] Available at: http://www.euronews.com/in-vogue/1958382-cannes-film-festival-hotel-rates-skyrocket-by-up-to-500-percent/ [Accessed: 9 Jun 2013].

·         Parkin, M. 2012. Economics. 10th ed. England: Pearson Education Limited.

·         Taylors, J. and Frost, L. 2006. microeconomics. 3rd ed. Australia: John Wiley & Sons Australia, Ltd, pp.41-45.

·         Unknown. 2013. PREDICTIVE POWERS OF HOTEL CYCLES. [online] Available at: http://www.whfreeman.com/college/pdfs/krugman_canadian/ch03.pdf [Accessed: 9 Jun 2013].

·         WorkBook Project. 2013. The Purpose of Film Festivals. [online] Available at: http://workbookproject.com/newbreed/2010/04/14/the-purpose-of-film-festivals/ [Accessed: 9 Jun 2013].