Event driven rate hikes: price gouging?

Most summers result in high gasoline prices which not infrequently  brings out that old chestnut: "price gouging". Hotels worldwide practice dynamic hotel pricing but when a concentrated spike in demand occurs due to specific events, anticipated or not, hotels tend to raise rates, sometimes by orders of magnitude. As is the case with gasoline, those rate spikes, rightly or wrongly, inflame consumers and, sometimes, attracts regulatory attention with the incendiary and actionable charge of price gouging.

The tenth anniversary of September 11th in New York is around the corner but it is unlikely the city will see any astronomical price increases as was the case when the terror strikes happened ten years ago. At that time, more than a few hoteliers sought to capitalize on the inability of out-of-towners to leave the area and jacked up rates in violation of New York's anti-price gouging laws which specifically prohibits "unconscionably excessive" prices during an abnormal disruption of the market resulting in a state of emergency. An exponential growth in hotel inventory since the attacks which combined with the fact that the anniversary is an anticipated event has resulted in no noticeable price hikes.

The foregoing is not the case with the Rugby World Cup 2011 in New Zealand next month or next year's 2012 Olympics starting July 27 in London. The international rugby board has already "warned" New Zealanders against gouging whether it cames to hoarded tickets or hotel rooms. While larger hotel chains are reportedly holding prices within the range of similar periods in prior years some others have chosen not to hew to the idea that keeping prices steady may result in repeat visits. Some London hotels, however, seem to have priced themselves off the charts with room rates reaching stratospheric levels past the £5,000 ($8,150)per night mark. And that is for a rather unpretentious Jury's Inn near an olympics site.

Nevertheless, the heated rhetoric about price gouging begs the question as many economists posit that price gouging actually serves customers well. A Washington Times op-ed on gasoline pricing notes that the "US's Federal Trade Commission  has found that public concerns over price gouging usually are misplaced. No matter that the FTC has repeatedly told Congress a federal price-gouging law would cause more problems than it solves." The author of that article contends that even in a dire emergency "consumers are better off with goods available. Merchants who keep their shelves restocked – even if at a higher price – do more for the community than the merchant unable or unwilling to restock." Similarly, a detailed study on price gouging published by the libertarian think-tank CATO entitled "The problem with price gouging laws" concluded that the evidence against price gouging both on the moral and economic spheres to be weak.

In the case of hotel prices, it is more than likely that the £5,000 is unsustainable as was the case with those who ratcheted up prices in anticipation of large tourist inflows for the recent royal wedding only to find few takers. The turn of the century eleven years ago so similar outcomes for New York hotels with many raising rates only to find themselves with unsold inventory as the milleniumnew year approached. Ultimately, consumers do make conscious and voluntary decisions with regard to purchasing a product or service and while they may be unhappy with pricing for a variety of reasons it is hard to argue against the idea of a supply-demand driven price outcome.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.