By Jing Sun, Gaoyi Hua, Yiyuan Huang
Since December 2019, the outbreak of coronavirus in China had brought tremendous changes in society. Almost all industries in the economy were negatively shocked, with the total revenue much less than before. Specifically, the hospitality industry was struck by the COVID-19 pandemic, and many hotels were turned upside down (Kilgore 2020). Government strategies to reduce the infection of COVID-19, such as community lockdowns, social distancing, stay-at-home orders, travel, and mobility restrictions, have caused many hotels to temporarily close, significantly decreased the demand for traveling, and many businesses were not allowed to operate (Bartik et al. 2020). People had gradually adapted to staying home, working, or studying online. Schools had used online teaching and many businesses had applied online business conferences. As a result, the hotel industry lost opportunities and customers, leaving more empty rooms and the daily price plunged. Moreover, under the new quarantine policy, the government asked hotels to offer their room unconditionally for those potentially infected people, which may have further influence on the lodging industry.
This study aimed to find out the overall impact of COVID-19 on the hotel industry, specifically on the daily prices of hotels. The analysis will focus on three different types of hotels in the Yangtze River Delta region of China, where the tourism industry makes a massive contribution to government revenue. The data used came from Shanghai Stock Exchange. The Difference-in-Differences (DID) model was used to study the causal effect of COVID-19 on the hotels’ daily price. The counterfactual hotel price of 2020, which refers to the 2020 hotel price as if COVID never happened, was predicted by the daily price data from 2017 to 2019. In the end, we made suggestions that the government could take to alleviate the difficult situation faced by the hotel industry.
The remainder of this report proceeds as follows. Section 2 describes the data and presents the visual change of hotel prices. Section 3 shows the DID model and the regression results. Section 4 concludes and provides some policy implications.
Data
The hotel price data was retrieved from Shanghai Stock Exchange. The range of hotels studied was restricted to the Yangtze River delta. Shanghai and the nearby city, Suzhou, were the objects of study since Shanghai is the most representative city in this area. Specifically, data from three hotels were analyzed, Jin Jiang International Hotel, mainly in Shanghai, and two famous hotels in Suzhou which were denoted as Hotel A and Hotel B. According to different standards, the hotels were divided into three levels—economical, comfortable, and luxury. Jin Jiang International Hotel has two standards of hotels, 2 star and 3 star, where 2 star hotel is classified as economical hotel and 3 star hotel is deemed as comfortable hotel. Hotel A and Hotel B belong to the luxury hotels since they are 5 star hotels.
Figure 1: Average Daily Price of Economical Hotels
Figure 1 plots the average daily price of economical hotels. The average daily price fluctuated regularly before 2020 before the pandemic began. The price varies since there are peak seasons and low seasons for tourism. However, in general, the fluctuations were stable and could be seen in a relatively increasing trend. In 2019, there was a slight decrease in the 2019 average daily price of economical hotels. If the trend continued, in 2020, the average price would be between 154 to 164 yuan. However, due to the negative effects caused by the 2020 coronavirus pandemic in China, the average price plunged from over 150 yuan to under 130 yuan, decreasing by approximately 14%.
Figure 2 Average Daily Price of Comfortable Hotels
The average daily price of comfortable hotels showed an increasing trend from 2017 to 2019. Similar to trends in Figure 1, the price of comfortable hotels varied through peak and low seasons of tourism, noting that the hotels usually perform best in Spring. Still, there was a decrease in the 2019 average daily prices. Based on the trend pre-COVID-19, the counterfactual price of a comfortable Hotel in 2020 should between 236 yuan and 260 yuan, while the actual price dropped to 217 yuan, at least 10% less than the prediction. This gap can be explained by the effects of the coronavirus pandemic in 2020 in China.
Figure 3 Average Daily Price of Luxury Hotels
The trend of the average daily price of luxury Hotel A and Hotel B is shown in Figure 3. From January 2017 to January 2019, the prices presented a generally increasing trend for about 5 yuan each year. However, the price slightly plummeted since 2019’s second season but did not go below the minimum price of the year from 2016 to 2019 until the first season of 2020. When the pandemic began, the average daily price of Hotel A decreased to 850 yuan, about 10% less than the pre-COVID-19 level. The impact on Hotel B was much larger, leading to a reduction in the price of approximately more than 150 yuan.
In summary, all of the three standards of the hotels in Shanghai or Suzhou have experienced obvious and severe negative effects due to COVID-19, with the price decreasing from 20 yuan per day to 150 yuan per day.
Model and Regression Results
To show how much each type of hotels has been impacted by COVID-19, a Difference-in-Differences (DID) model was used:
yit=β0+β1T+εit
where yit is the average daily price of Hotel i at time t, T is an indicator of whether time t is post-pandemic (1 if t is in 2020, 0 if t is before 2020). β0 represents the average daily price before the pandemic began, while β1 measures the impacts of COVID-19 on the hotel price.
Table 1: Estimation results of the DID model
Table 1 reports the results of our DID model, showing the impact of the pandemic on three different types of hotels. During the pandemic, the Suzhou luxury hotels’ average daily price decreased largely: the larger the value of the coefficient of T, the worse the situation the hotel underwent. In season one, the impact is -82.68 which indicates the average price has decreased by 9.41%; In season two, the estimated impact is worse than that of season one, which is -121.34; In season three, the coefficient is -68.16, which shows that those hotels’ loss has been smaller with the help of the government. In Shanghai’s economical hotels, because their price was relatively smaller than that of luxury hotels, the average price was not largely affected like that of luxury hotels. However, compared to the average price without the intervention of COVID-19, it is obvious that economical hotels were also affected by COVID-19 seriously. In season one, Shanghai’s economical hotels’ average price decreased by 2.24 yuan, but the impact is statistically insignificant. In season two, the situation was worse than that of season one, where COVID-19 lowered the price by 32.41 yuan, and it’s statistically significant at 5% level. In season four, the estimated effect is -21.87, slightly smaller than season two but still significantly higher than that of the pre-pandemic level. Shanghai’s comfortable hotels suffered the same level of difficulties as the economical hotels. The impact of COVID-19 on the price of season 2 is the largest, which is -47.76, followed by that of season 4 and season 1.
Conclusion
We used a Difference-in-Differences model to study the impact of the pandemic on hotel prices. There are two main findings. Firstly, the hotels’ daily price had been depressed in 2019 and it became worse in 2020 because of COVID-19 regardless of the standards of the hotels. Secondly, although the pandemic had a huge impact on the whole hotel industry, the hotels with a higher level of standards were influenced to a greater extent. These results could provide some suggestions that the government could regulate and control the hotel industry properly during this pandemic. For example, they can give more subsidies to the hotels that experienced more loss or encourage them to develop relevant alternatives to increase their revenue.
References:
Bartik, Alexander W., et al. “How Are Small Businesses Adjusting to COVID-19? Early Evidence from a Survey.” NBER, 13 Apr. 2020, http://www.nber.org/papers/w26989.
Kilgore, Tomi. COVID-19 Hit the Hotel INDUSTRY Hard. Here’s How Hotels Are Pivoting in the New Reality. 31 Aug. 2020, http://www.marketwatch.com/story/covid-19-turned-the-hotel-industry-upside-down-but-it-wont-change-what-people-want-2020-08-23.
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