Question

University towns with major football programs experience an increase in demand for hotel rooms during home football weekends. Hotels respond to the increase in demand by increasing the prices they charge for rooms. Periodically, there is an outcry against the higher prices, accompanied by accusations of "price gouging." a. Draw a demand and supply graph of the market for hotel rooms in Boostertown for weekends with home football games and another graph for weekends without home football games. If the Boostertown city council passes a law stating that prices for rooms are not allowed to rise, what would happen to the market for hotel rooms during home football game weekends? Show your answer on your graph. b. If the prices of hotel rooms are not allowed to increase, what will be the effect on out-of-town football fans? c. How might the city council's law affect the supply of hotel rooms over time? Briefly explain. d. University towns are not the only places that face peak and nonpeak "seasons." Can you think of other locations that face a large increase in demand for hotel rooms during particular times of the year? Why do we typically not see laws limiting the prices hotels can charge during peak seasons?

Short answer

In the short term, price restrictions could lead to a shortage of rooms during high demand, leaving some out-of-town fans unable to get rooms. Over the long term, if hotels cannot charge higher prices during peak demand, they might not have the incentive to remain open or expand, leading to a decrease in supply. Similar scenarios occur in other tourist locations during peak seasons. Laws limiting peak prices are not common as they interfere with market dynamics causing inefficient results.

Step-by-step solution

Draw the demand-supply graphs

Two separate demand and supply graphs are needed - one representing weekends with home games and the other representing weekends without home games. On weekends with home games, the demand curve will shift to the right indicating higher demand, which leads to higher prices if the supply remains constant. On non-game weekends, demand remains normal, causing prices to stay within the regular range. We can mark the point where supply equals demand as an equilibrium point.

Illustrate the Impact of Price Control

If the city council sets a maximum price for hotel rooms, illustrated as a horizontal line on the graph, it would affect the market during home football weekends. The price restriction would be below the market-clearing price where supply equals demand. This leads to a shortage in supply of hotel rooms, as more people demand rooms at the lower price than the suppliers are willing to offer.

Effects on Out-of-Town Fans

Because of the price restriction during high demand, there can be a shortage of hotel rooms. Thus, some of the out-of-town fans might not find rooms to book. Therefore, not all fans who wish to stay in town will be able to do so.

Evaluate the Long-Term Effects on Hotel Room Supply

Over time, if hotels cannot increase their prices during high demand periods, they might not have the incentive to remain open or expand. The supply of hotel rooms could decrease over time, further exacerbating the room shortage during football weekends.

Generalize to Other Locations with 'Peak and Nonpeak Seasons'

Similar scenarios are also seen in places with tourist peaks due to seasonal attractions or events. For example, beach-front hotels during summers, ski-resorts in winters, etc. Experience high demand during these peak periods.

Discuss Why Laws Don't Limit Peak Prices

Laws limiting prices during peak demand are not common because they can interfere with the free market system. They can lead to shortages in supply as we discussed previously, which is not an efficient solution.

Key concepts

Elasticity of Demand

When exploring the dynamics of hotel markets, understanding the elasticity of demand is crucial. This term refers to how sensitive the quantity demanded is to a change in price. In essence, it measures the responsiveness of consumers when they're faced with a higher or lower price for hotel rooms.

During home football game weekends in Boostertown, we see a clear example of how demand can be inelastic. Out-of-town fans prioritize attending the game and are willing to pay a premium for accommodation. As the price of hotel rooms increases, the quantity demanded doesn't drop significantly because attending the event is the primary concern, not the cost of the hotel. Conversely, the demand for hotel rooms during non-game weekends is likely to be more elastic. If prices rise too high, travelers may choose alternative accommodations or cancel their trips entirely.

Understanding elasticity helps businesses set prices strategically to maximize revenue, especially during times when they can exercise some price power due to inelastic demand.

Market Equilibrium

The market equilibrium is a fundamental concept in understanding how hotel markets operate. It's the point where the quantity of hotel rooms demanded by consumers equals the quantity supplied by hotels, resulting in a natural market price. This equilibrium ensures that there is no excess supply or unmet demand under free market conditions.

The supply and demand graphs for Boostertown with and without home football games depict two different equilibrium points. During game weekends, the increased demand for hotel rooms shifts the demand curve to the right. If the supply doesn't change, the equilibrium price rises, and hotels capitalize on this higher demand. On the contrary, for weekends without games, the market equilibrium rests at a lower price due to the regular demand level.

Price Control Impact

Implementing price controls in hotel markets, such as price caps during high-demand periods like football game weekends, has significant impacts. When a maximum price is enforced, it's typically set below the equilibrium price, which would naturally clear the market. This creates a shortage as the quantity of hotel rooms demanded at this capped price exceeds the quantity that hotels are prepared to supply at that price.

Short-Term Consequences

Initially, consumers may appear to benefit from lower prices, but the artificially increased demand leads to some customers being unable to secure a room. This presents a challenge for out-of-town fans who find that their access to accommodations is restricted not by price, but by availability.

Long-Term Consequences

Moreover, when price controls are in place, hotels have less incentive to maintain, upgrade, or expand their facilities, which could lead to a long-term decrease in the supply of hotel rooms. This lack of investment and potential deterioration of quality can negatively affect the entire hotel market in Boostertown.

Seasonal Demand Variations

Hotel markets frequently experience seasonal demand variations, which significantly affect pricing and availability. In Boostertown, football games create a peak season with heightened demand. However, this is not unique to university towns. For example, beach destinations see a surge during the summer, while ski resorts are busiest in the winter.

The demand during these peak seasons is usually more inelastic; that is, consumers are less sensitive to price changes. They are willing to pay more because the reason for their travel - enjoying the beach during summer or skiing during winter - is tied to the season.

Understanding seasonal demand is essential for hotel management to plan and allocate resources efficiently. Strategic pricing during these peak periods allows hotels to maximize revenue and cater to the surge in customers, without arbitrary price restrictions that could discourage hoteliers from providing the best service and accommodation.