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Impact of sharing economy on the traditional hotel industry

Discuss about the Interventions and Policy Instruments for Sustainable.

The objective of this report is to analyse the concept of sharing economy and its impact on traditional hotel industry. In order to contextualise the analysis, Switzerland has been taken as the case study. Sharing economy is an emerging concept in economic discussion. In the era of globalisation and economic integration, flow of resources facilitates organisations and economic development. Sharing economy is an integrated network that resources such as knowledge, equipment and skills are shared among people or organisations. Sharing resources increases efficiency (Zervas, Proserpio and Byers 2016). Both the Supplier and consumer can participate in the sharing economy. There are different forms of sharing economy such as crowd funding, peer to peer lending, house renting, co working, reselling and trading, knowledge sharing. Implementation of sharing economy is increasing in the traditional hospitality industry in present days and especially in Switzerland. This report focuses on the positive and negative impact of sharing economy on the hotel industry. Impacts of government intervention are discussed also in this report.

In the view of Malhotra and Van Alstyne (2014), sharing economy is a concept when a person or organisation borrows or rents resources to someone else. This model is commonly used when price of resources are high at market place. Therefore, sharing economy facilitates the borrower by availing the resources at a lower cost. The concept of sharing economy has emerged after the success of Airnb, which provides room services at rent for the travellers. According to the Wall Street Journal, the service of Airnb has become more valuable compared to the traditional hotel industry. A institution in sharing economy, which provides room services, provides a platform for the travellers to choose a place acceding to their choice, budget, amenity needs (Kang et al. 2012).

One advantage of sharing economy is availability of services at a lower cost. This model mainly facilitates the consumers. It reduces the transaction cost through online services. Duverger (2013) cited that App based search model helps the travellers to find a suitable place for accommodation at the time international tour. Usually the prices of products or services are kept low compared to the traditional hotel services. As the price of product in sharing economy is low, demand for that product or service is high from the consumer end.

Sharing economy provide greater flexibility for the suppliers. Suppliers are able in this economy to provide services whenever necessary. Airnb has successful operation in Switzerland. This company follows peer to peer accommodation model in market place. It provides room services to the customer without owning a property. This company receives revenue from both the host and the customers. Consumers choose between the services of this type of company and traditional hotel industry based on the opportunity cost. As stated by Prudhomme and Raymond (2013), opportunity cost is the cost of using a service foregoing other alternatives. Consumers always analyses cost and benefit of the available alternatives in the market place based on budget and utilities. They choose the alternative, which has minimum cost and maximum utility or benefit. As mentioned by Azmat, Manning and Reenen (2012), that the transaction cost and cost of availing service in sharing economy is lower compared to traditional hotel industry, consumers tend to choose the former.

Advantages of sharing economy

Availability of alternatives is more in the sharing economy. Koopman, Mitchell and Thierer (2015) stated that demand for hotel room and food services are price elastic, where. Therefore, little increase in price of hotel services has negative impact on revenue. As argued by Azmat, Manning and Reenen (2012), demand for companies in sharing industry is price elastic as the competition in sharing economy is growing in Switzerland in present days.

The reason behind higher price for hotel services is higher cost of operation. Labour cost, capital cost and other infrastructural costs keep the price higher (Duverger 2013). Companies such as Airnb have no such cost being an online service provider. This provides competitive advantage to Airnb in the sharing economy over the traditional hotel demand. These companies generally play as online resource sharing platform to the consumers.

Sharing economy has emerged as a competitor for hospitality industry. Predominantly, hoteliers operate in the monopolistically competitive market in Switzerland. Sharing economy in this industry has emerged as tough competitors for the traditional hotel. Malhotra and Van Alstyne (2014) stated that companies providing online platform for availing room services for international travellers themselves operate in the oligopoly market. There are a few numbers of such companies operate worldwide. In the view of Kang et al. (2012), emerge of sharing economy has negative impact on hotel demand and revenue. Hotel rooms are main sources of revenue for hotel industry. Zervas, Proserpio and Byers (2016) mentioned that focus on apartments, entire suits are less in hotel compared to companies in sharing industry. Demand for companies in sharing economy is increasing as consumers are getting more facilities, comfort at a lower cost.

Prud’homme and Raymond (2013) argued that sharing economy needs not be viewed as the competitors or substitute of hotel industry. Moreover, these two types of industry can be regarded as complementary to each other. Hotels can create collaboration with the companies operate in sharing economy such as Airnb. This strategy can improve supply chain management and increasing efficiency in both types of industries. Azmat, Manning and Reenen (2012) made an argument that improvement of technology has increased the performance of the hotel industry.

Koopman, Mitchell and Thierer (2015) mentioned that investment in talent management in Switzerland in high. Hence, labour cost and production is high in this country. Therefore, cost of operation is higher in traditional hotel industry compared to the companies in sharing economy.

Impact on hotel industry

The share economy approach in the hospitality industry increases efficiency in the market due to its free market system. A government intervention will change the equations and reduce efficiency. The intervention from the government of Switzerland can come through two channels namely fiscal and monetary. In the case of a fiscal intervention, the government can introduce a tax structure for the share economy followers in the industry (Sheu and Chen 2012). This will increase the prices of the services being provided. The rising share economy can be another revenue source for the government. The Switzerland government can also introduce a monetary intervention. The monetary intervention can come through change in the interest rate.

The government can introduce a tax for the share economy followers in the hospitality industry of the country. This will increase the price of the services being provided. The situation is depicted in the figure below:

As the figure above shows, the introduction of tax will increase the prices for the services that have been provided through share economy in the hospitality industry of Switzerland. In the figure the price increased from P to P’. It also reduces the output from B to A. This tax introduction has the target of increasing the price in order to give the local hotels and lodges the chance to earn revenue and create job opportunities (Philippon and Skreta 2012). This will reduce unemployment in the locality.

The monetary intervention coming through interest rate which is targeted for the share economy followers can decrease the investments in the sector. This will discourage the local start-ups from entering into the market. The monetary intervention will also benefit the hotels and the establishments which are already operating in the market (Bramwell 2012).

The government intervention increases the equilibrium price. This can result in market failure where the market equilibrium does not mean efficient allocation of resources. This decreases the net social welfare as well. As the figure above shows, the total output will reduce due to the government intervention in the hospitality industry (Cannon and Chung 2014). The sum up of the lost efficiencies will decrease the potential contribution of the industry to the Gross Domestic Product (GDP) of the country.

Demand for sharing economy is rising in Switzerland. Growth of sharing economy has made the hotel industry competitive. In the free market, the revenue is greater in sharing economy compared to the government intervention. Government intervention in the form of price ceiling can increase market failure by increasing deadweight loss in the economy. Hence, it can be recommended that sharing economy and hotel industry need to operate in free market in order to increase efficiency. Increasing collaboration between company such as Airnb and hotels can improve multiple services provided by the hotels. Therefore, there will be other ways of generating revenue for traditional hotels apart from room services.

Conclusion

The report has critically analysed the impact of sharing economies on the traditional hotel industry. Sharing economy has both positive and negative impact on the economy. Consumers are benefited from the emergence of the sharing economy as it provides greater alternatives to the consumers by reducing transaction and search cost. Moreover, operating in free market raises efficiency in market place. Government intervention increases market failure in the sharing economy. Government intervention is necessary for monetary policy regulation as reduction in interest rate encourages investment in the economy both for sharing economy and the hotel industry.

References

Azmat, G., Manning, A. and Reenen, J.V., 2012. Privatization and the decline of labour's share: international evidence from network industries. Economica, 79(315), pp.470-492.

Bramwell, B., 2012. 21 Interventions and policy instruments for sustainable tourism. Edited by William F. Theobald, p.406.

Cannon, B. and Chung, H., 2014. Framework for Designing Co-Regulation Models Well-Adapted to Technology-Facilitated Sharing Economies, A. Santa Clara Computer & High Tech. LJ, 31, p.23.

Duverger, P., 2013. Curvilinear effects of user-generated content on hotels’ market share a dynamic panel-data analysis. Journal of Travel Research, 52(4), pp.465-478.

Kang, K.H., Stein, L., Heo, C.Y. and Lee, S., 2012. Consumers’ willingness to pay for green initiatives of the hotel industry. International Journal of Hospitality Management, 31(2), pp.564-572.

Koopman, C., Mitchell, M.D. and Thierer, A.D., 2015. The sharing economy and consumer protection regulation: The case for policy change. The Journal of Business, Entrepreneurship & the Law, 8(2).

Malhotra, A. and Van Alstyne, M., 2014. The dark side of the sharing economy… and how to lighten it. Communications of the ACM, 57(11), pp.24-27.

Philippon, T. and Skreta, V., 2012. Optimal interventions in markets with adverse selection. The American Economic Review, 102(1), pp.1-28.

Prud’homme, B. and Raymond, L., 2013. Sustainable development practices in the hospitality industry: An empirical study of their impact on customer satisfaction and intentions. International Journal of Hospitality Management, 34, pp.116-126.

Ranchordás, S., 2015. Does sharing mean caring: Regulating innovation in the sharing economy. Minn. JL Sci. & Tech., 16, p.413.

Sheu, J.B. and Chen, Y.J., 2012. Impact of government financial intervention on competition among green supply chains. International Journal of Production Economics, 138(1), pp.201-213.

Zervas, G., Proserpio, D. and Byers, J., 2016. The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry. Boston U. School of Management Research Paper, (2013-16).

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