Olympics 2012 - an Economic Analysis

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The Telegraph, July 24, 2012
London 2012 Olympics: hotel prices fall as visitor rush fails to materialize The cost of a London hotel room during the Olympic Games has dropped sharply, as an expected surge in bookings has failed to materialize. Rooms which were being offered for an average £210 have now been cut in price to £160, according to one survey. Tourism chiefs confirmed the fall, which comes after Locog, the games’ organizers, released thousands of unwanted hotel rooms in the capital and hoteliers began to abandon minimum stay rules, allowing tourists to book one or two night stays. The average rate for rooms in London during the main Olympic period of July 27 to August 12 has fallen from £213 to £160 – a drop of 24 per cent – the new figures will reveal next week.

Detailed NEWS Article source: http://www.telegraph.co.uk/sport/olympics/london-2012/9350831/London-2012-Olympics-hotel-prices-fall-as-visitor-rush-fails-to-materialise.html

Introduction:

As the Olympic Games have already begun, the realities have come face to face to the parties involved in the organization of the event. The hoteliers are the worst hit. Due to some unaccounted factors, the visitors for the event didn’t turn up and thus the hotel industry was hit badly as compared to others. The following report tries to understand the undercurrents of the demand and supply functions, thus analyzing the situation.

Impact of London Olympics on the Supply and Demand Mechanism of the Hotel Industry:  
 The 17 day long Olympic Games and 12 days long Paralympics Games will create a huge demand for hotel rooms. As many as 294000 spectators were expected to visit London every day. Whereas, the supply of hotel rooms is only about 110000 in the London area, a third of these had already been allotted to the Olympic personnel. Taking the advantage of the situation, the hoteliers were charging as high as 390 % of premium price, which is huge as compared to the typical London hotel price hike of 54%.  

A diagram can is used here in understanding the concept of Excess Demand:  

 
As it can be seen in the diagram, the supply of hotel rooms in London is 110000; whereas the demand for the same is expected to be 294000. Hence, this situation has led to an increase in price, which is more than 390%. Here, apart from the limited supply other factors have also contributed to the skyrocketing price hike. But the major factor is the restricted supply here.  

As per the news article, the outsiders for the games failed to materialize. And the hotels are facing empty hotel rooms, bringing the skyrocketing prices to a downward ride. Because of the decreased demand, the hoteliers had to cut back the prices from £213 to £160, hoping to increase the visitor's footsteps in the city.  

Here, it is important to note that the decrease in demand is not a result of the high rates of hotel rooms. The factors are external, such as substitutes' availability, competitors' policy, income of the tourists, time element, distance, etc.  

Demand function:
 
Qd = f (P, S, C, I, D)
 
Qd: Quantity demanded, here hotel rooms demanded
P: Price of hotel-room per night
S: Substitutes available in the market
C: Competitors available in the market
I: Income of tourists/visitors
D: Distance of the venue from the tourist nation
 
Interpreting the factors one by one:
 
Price:
 
As price is the major factor affecting the demand for hotel rooms, a lesser demand induced the suppliers to reduce the price. A 25% decrease in price can be seen in the example given in the article.  

Substitutes:
 
Meeting the demand of 294000 spectators with 110000 hotel rooms is impossible. And hence, the substitutes like Home rentals, University Dorm rooms, hostels, bed and breakfast joints, road-side motels, etc come into the picture.  

Competition:
 
The cut in the number of visitors also resulted in price war amongst competitors like Britannia International and London Ealing Hotel....
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