A Model of Room Rentals in a Seasonal Hotel Illustrating Monopolistic Competition

Abstract

We illustrate monopolistic competition with an original model of hotel rooms for daily rental that has peak and off-peak demand periods. There are two types of hotels, hotelK and hotelL, each having linear total costs with absolute capacity limits. HotelsK are static efficient since they operate with low MC. They are open year-around and always at full capacity. HotelsL are output flexible since they operate with low FC. They open only in the peak-demand periods. We show, under conditions of the model, that the added cost to supply irregular demand should be small because of hotelsL low FC. We show, under the conditions of the model, that the added gain in consumer surplus in increasing the irregularity should be large because consumers will be switching some consumption from off-peak to peak periods.