Tourism, Security and Safety From Theory to Practice

Supply Estimates
The supply or minimum bed night price hotels charge to foreign visitors rises in
Table 1 with the number of bed nights foreigners demand. At sample means, a 10%
rise in foreign demand increases the foreign bed night price by 1.8%. Supply to the
foreign market is the positively sloped function one normally expects of supply
relationships: Israeli hotels’ short-run marginal costs rise with the number of for-
eign visitors. Solving for QF and inverting equation (4) shows that hotels allocate
more rooms to foreigners as the latter pay higher prices. Higher wage rates to hotel
employees (
W
) lift the supply price to foreigners upward, shifting the foreign sup-
ply function to the left. Nevertheless, the 0.611 coefficient on the lagging price
variable implies prices respond sluggishly to demand and wage rate changes.
Notably, the relationship between local demand quantity QL and local supply
price PL
s
in Table 1 is negative. That is, the short-run supply function in the local
market has a negative slope in the neighborhood of the observed market equilib-
ria, suggesting short-run marginal costs decline as local occupancy rates rise.
Negatively sloped supplies are not uncommon in the lodging industry. Horwath
Consulting (1994), for example, reports substantial evidence of high fixed costs
and scale economies in British hotel chains. In the present short-run context, mar-
ginal costs consist of labor and material expenses plus any reputation costs implicit
in the room rates charged. Marginal labor and material inputs may decline with
increasing local guest volume if these inputs have an overhead component to them,
as when a minimum housekeeping staff and power supply are required even when
occupancy rates are low. The same size economies may not apply to foreign visi-
tors, especially if services they demand are more labor-intensive than are services
to Israelis. In any event, the local supply function is much flatter than the local
demand function (in Table 1, 
⎪−
0.026
⎪
< 
⎪−
1/4.31 
⎪
), so equilibria are stable in the
Marshallian sense. That is, when local demand prices exceed local supply prices
(to the left of an intersection point), hoteliers boost supply quantities, shifting the
market in the direction of equilibrium.
Because, as discussed above, Israeli hotels normally allocate rooms to the local
market only after most international demand has been satisfied, supply price PL
s
to Israeli guests ought to depend not only on Israeli demand QL and on hotel labor
costs, but on international demand QF and on the total number of beds QT as well.
The positive and statistically significant coefficient of QF in the PL
s
column of
War, Terror, and the Tourism Market in Israel
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Table 1 says that as foreign demand drops, the negatively sloped short-run supply
to Israelis shifts leftward and prices to the local market fall. The shift, however, is
not great: a drop in foreign demand of 100,000 bed nights per month reduces the
price to Israelis by only $1.30. The situation is depicted graphically in Figure 7,
which will be discussed later in this chapter. On account of the low short-run equi-
librium occupancy rates, local demand intersects local supply where the latter is
negatively sloped. Declines in international demand shift the local supply function
downward but also raise the maximum number of rooms available to Israeli guests,
in the vicinity of which local supply presumably has the normal positive slope.
The high standard error on the coefficient of QT in Table 1 suggests the long-
run Israeli supply function is horizontal: the industry faces constant costs in the
sense that changes in hotel capacity have no major effect on long-run marginal cost
or thus price. Long-run marginal costs include capital as well as labor, material,
and energy inputs.