How Does Advertising Affect the Price Elasticity of Lodging Demand? Evidence from Taiwan

Abstract

This paper empirically studies the role played by advertising on the price elasticity of lodging demand in the Taiwanese hotel industry. There are two theoretical views regarding the role of advertising. The persuasive view emphasizes that advertising creates brand royalty and reduces customers' price sensitivity. By contrast, the presumptive view is that advertising lifts marginal consumers' willingness to pay, flattens the demand curve and increases the equilibrium price elasticity. Using data from operation reports of Taiwanese international tourist hotels during 1995–2008, an ordinary least squares (OLS) analysis finds that advertising reduces consumers' price sensitivity. However, the quantile regression results suggest that the change in price elasticity generated by advertising is of an unequal pattern. In other words, the influence of advertising on price elasticity exists but varies by the level of price elasticity. The authors also examine empirically the moderating influence of advertising on the pricing strategy–hotel performance link. The estimation results indicate that the interaction term of room rate and advertising expenditure has a positive effect on room revenue. The results lend some support to the view that advertising has a moderating influence on the relationship between hotel price and financial performance.