Estimation of Profit Efficiency in the Hotel Industry Using a Bayesian Stochastic Frontier Model

Abstract

The present study measured profit efficiency and its determinants in the hotel sector in Spain from 2010 to 2014, using a Bayesian stochastic frontier approach. This model provides estimates of efficiency and more accurate confidence intervals than the traditional frequentist approach. The results revealed that the hotels are operating with significant profit inefficiencies. These inefficiencies are significantly affected by size, location, occupancy rate by region, customer satisfaction, and whether the hotel is affiliated or independent. Finally, the study points out the strategic implications of these findings, to improve the efficiency of the hotels.

Efficiency evaluation of hotel chains: a Spanish case study

“…For example, Barsky and Labagh (1992) and Chu and Choi (2000) report evidence that holiday tourists find the location of a hotel establishment crucial in their decision process. Arbelo et al (2018) find that profit efficiency is higher in hotels based in resort areas. Some of the location variables considered in the literature are the distance from an international airport (Hu et al 2010;Honma and Hu 2012), the existence of a major road or the distance from a city (Barros 2005) and a seaside town (Bernini and Guizzardi 2010); see Yang et al (2014), for a complete review of the main models and variables used in deciding upon a hotel's location.…”

“…The majority of these studies estimate technical efficiency and use cost functions as frontiers. Exceptions are the works by Oliveira et al (2013b) and Arbelo et al (2018) where revenue and profit efficiency are considered, respectively. Arbelo-Pérez et al (2017) point out that cost inefficiency has several drawbacks since it does not differentiate between hotels in terms of the quality of their services.…”

“…The evidence found in the literature regarding hotel size and performance is not completely clear, although several studies have suggested that larger, individual hotels can achieve higher levels of performance due to economies of scale, higher bargaining power and more possibilities of funding and investment; see, e.g., Claver et al (2007a, b), Kim et al (2013) and Babayan et al (2014). and Arbelo et al (2018) report evidence that large chain hotels achieved a better performance than small, independent hotels. Also, Babayan et al (2014) show that the size of a hotel positively affects the total revenue and that establishments with less than one hundred rooms do not seem to manage their assets so well.…”

“…Nevertheless, there are relatively few works that explore this issue. Some examples are Greene (2005), Galán et al (2014) and Arbelo et al (2018).…”

“…In particular, regularity conditions are easily incorporated and parameter uncertainty is formally considered in deriving posterior densities for individual efficiencies. Bayesian approaches have been applied in the hospitality industry in Assaf (2012), Assaf and Magnini (2012), Assaf and Barros (2013) and Arbelo et al (2018).…”