The Airbnb Effect: Cheaper Rooms for Travelers, Less Revenue for Hotels 03-06

Hotels enjoy their highest profits when rooms are most in demand, like during holidays and big events. Unfortunately for them, Airbnb is taking away some of that pricing power, according to new research by Chiara Farronato and Andrey Fradkin. 

Image credit : Shyam's Imagination Library

Airbnb is revolutionizing the lodging market by keeping hotel rates in check and making
additional rooms available in the country's hottest travel spots during peak periods when hotel rooms often sell out and rates skyrocket, a new study shows.

That's bad news for hotels, which have traditionally earned their biggest margins when rooms were scarce and customers were forced to pay higher rates—such as in Midtown Manhattan on New Year's Eve. And it's good news for travelers who don't have to pay through the roof to get a roof over their heads during holidays or for big events.

"The benefits to travelers and the reduction in pricing power of hotels is really concentrated in particular cities during certain times," says Chiara Farronato, a co-author of the study. "When hotels are fully booked, Airbnb expands the capacity for rooms."

Released today, the research shows that in the 10 cities with the largest Airbnb market share in the US, the entry of Airbnb resulted in 1.3 percent fewer hotel nights booked and a 1.5 percent loss in hotel revenue.

The paper, The Welfare Effects of Peer Entry in the Accommodation Market: The Case of Airbnb, was written by Farronato, a Harvard Business School assistant professor, and Andrey Fradkin, postdoctoral fellow at the Initiative on the Digital Economy at the Massachusetts Institute of Technology.

"You might find a Fifth Avenue apartment or a place by the beach at a more reasonable price than you would if Airbnb wasn't an option"

Competition between traditional hotels and Airbnb is intensifying. Last Friday, Airbnb announced it is expanding its "experiences" offerings to an additional 1,000 cities. Meanwhile, the lodging industry is not only adding its own offerings, but stepping up lobbying efforts in local and federal circles for stricter regulations governing Airbnb.

The study focused on data from 2014, and the impact on hotels could be even greater today given Airbnb's strong growth since then.

In addition to access to more rooms, travelers reaped other rewards in places where Airbnb competed with hotels, the study shows. During busy travel times, guests enjoyed an average "consumer surplus" of $57 per night. This surplus didn't necessarily amount to more money in a visitor's pocket, but it did mean better accommodations at more reasonable prices, Farronato explains.

"Consumers don't always pay a lower price," Farronato says. "What changes is the quality of the listings. You might find a Fifth Avenue apartment or a place by the beach at a more reasonable price than you would if Airbnb wasn't an option. Or a listing might have additional amenities, like a kitchen. And if you still prefer a hotel room, competition from Airbnb means you'll pay a lower price for it."

Airbnb's rapid growth

Airbnb, an online community marketplace where people can list and book short-term lodging accommodations around the world, was founded in 2008 and has grown rapidly at a time when plenty of other industry-disrupting platforms have flourished, including Uber, Craigslist, and Spotify.

Airbnb offers listings in 191 countries, and its total number of listings—4 million-—is higher than the top five major hotel brands combined.

To compare the performance of hotels versus Airbnb, the researchers used hotel data from STR, which tracks more than 161,000 hotels, as well as proprietary data provided by Airbnb, creating "the perfect setup to study market competition between new online platforms and traditional service providers," Farronato says. They studied prices and occupancy rates in 50 major US cities between 2011 and 2014, targeting markets with the largest number of hotels.

During the study period, Airbnb made a relatively small dent in the overall short-term accommodations market. Its rooms represented 4 percent of all guests and less than 1 percent of total housing units across all cities. And Airbnb didn't have much effect on hotel occupancy rates overall. Since Airbnb bookings occurred especially when hotels were already near full capacity, a large share of these bookings—between 40 and 60 percent—would not have been made at hotels if Airbnb wasn't an option.

The San Francisco-based home-sharing platform still made its mark on the hotel industry, however. The researchers found that Airbnb's growth through 2014 reduced hotel variable profits by up to 3.7 percent in the 10 US cities with the largest Airbnb presence.

This effect was particularly strong in cities with limited hotel capacity during peak demand days. On those days, hotel room prices were affected relatively more than occupancy rates, meaning that a hotel in one of these cities might still be fully booked during a peak period, but the competition from Airbnb may have forced the hotel to lower its rates for those rooms.

Airbnb rooms were more plentiful in cities with a big demand for accommodations, as well as areas with higher-priced hotels, like New York, Los Angeles, and San Francisco. In other places such as Oklahoma City and Memphis, however, listings were sparse by comparison.

"It's important to note that not all cities are affected by Airbnb," Farronato says. "In Atlanta or Houston, there are enough hotel rooms to satisfy the demand, so peer hosts don't find it attractive to enter the market as much there."

Within each city, more Airbnb rooms cropped up during popular travel periods, such as Christmas and the summer. Sports games, festivals, and other events also led to a spike in listings. In Cambridge, Mass., the biggest listing period came during college graduation time.

And that's the beauty of Airbnb for hosts: They can respond quickly to market conditions, keeping their homes for private use when prices are low and hosting travelers only when the demand for rooms—and the payoff from renting them—is highest.

"As a host, you might not want to risk renting out your place for just $80 a night," Farronato says. "But when the pope comes to Philly, and hotel prices are $200, it becomes worth your while to put your spare room out for rent. Airbnb hosts are in this sweet spot where they can take advantage of only the high-demand periods and stay out of the market at other times."

Hotels fight back

Lodging groups have not taken Airbnb's incursions lightly. Starting in 2016, the American Hotel and Lodging Association backed efforts by the Federal Trade Commission and the state of New York to investigate Airbnb's impact on local housing prices, according to The New York Times. The AHLA also launched a campaign to portray Airbnb hosts as being, in reality, commercial operators looking to compete illegally with hotels.

As margin pressure increases from Airbnb properties over time, hotels will be forced to step up the competition even more. The problem: fixed investment costs. The demand for rooms is always fluctuating, but it's not efficient for hotels to build enough capacity to satisfy the peaks, so they are challenged with finding the right middle ground.

"When the pope comes to Philly, and hotel prices are $200, it becomes worth your while to put your spare room out for rent"

"If you have too much capacity, you will have a lot of empty rooms most of the time," Farronato says. "And if you have too little capacity, you won't be able to satisfy the demand, and Airbnb hosts will come in and drive prices down when demand is high."

Farronato said home-sharing platforms are likely to gain even more ground over time as consumers become increasingly aware of their benefits, so it's important for hotels to find creative ways to compete. At the same time, as cities add home-sharing regulations, both the benefits of Airbnb to consumers and hosts, as well as the effects on hotels, will likely become less pronounced.

Just as Airbnb is adding experience packages to its home-rental offerings, so too are hotels such as Marriott International. And maybe hotels could even find ways to alter their building spaces on the fly to accommodate the peaks and valleys of consumer demand.

"You could have rooms that quickly and dynamically change from hotel rooms into conference rooms. So you can have this flexible capacity of rooms that are available on New Year's Eve, but become conference spaces at other times," Farronato says. "It requires a whole new way of designing things. It's all worth thinking about."

Reproduced from Harvard Business Working Knowledge

How to Get People Addicted to a Good Habit 02-16

Researchers set out to discover whether they could induce households to develop a healthy habit of handwashing with soap. Here a young boy in West Bengal, India, uses a wall-mounted soap dispenser provided by the research team. (Source: Reshmann Hussam)

Reshmaan Hussam and colleagues used experimental interventions to determine if people could be persuaded to develop a healthy habit. Potentially at stake: the lives of more than a million children.

A few years ago, Reshmaan Hussam and colleagues decided to find out why many people in the developing world fail to wash their hands with soap, despite lifesaving benefits.

Every year more than a million children under the age of five die from diarrheal diseases and pneumonia. Washing hands with soap before meals can dramatically reduce rates of both diarrhea and acute respiratory infections.

To that end, major health organizations have poured a lot of money into handwashing education campaigns in the developing world, but to little avail. Even when made aware of the importance of a simple activity, and even when provided with free supplies, people continue to wash their hands without soap—if they wash their hands at all.

“If you look at these public health initiatives, you see that they are often a complicated combination of interventions: songs and dances and plays and free soap and water dispensers,” says Hussam, an assistant professor at Harvard Business School whose research lies at the intersection of development, behavioral, and health economics. “Which means that when these initiatives don’t work, nobody can say why.”

When Hussam and her fellow researchers conducted their initial survey of several thousand rural households in West Bengal, India, they discovered that people don’t wash their hands with soap for the same reason most of us don’t run three miles every morning or drink eight glasses of water every day, despite our doctors lecturing us on the benefits of cardiovascular exercise and hydration. It’s not that we are uninformed, unable, or lazy. It’s that we’re just not in the habit.

“The idea is that habits are equivalent to addictions”

With that in mind, the researchers designed a field study to understand whether handwashing with soap was indeed a habit-forming behavior, whether people recognized it as such, whether it was possible to induce the habit with experimental interventions, and whether the habit would continue after the interventions ceased.

The field experiment was based on the theory of “rational addiction.” Developed by economists Gary Becker and Kevin Murphy, the theory posits that addictions are not necessarily irrational. Rather, people often willingly engage in a particular behavior, despite knowing that it will increase their desire to engage in that behavior in the future (i.e. become “addicted”). As “rational addicts,” people can weigh the costs and benefits of their current behavior taking into consideration its implications for the future, and still choose to engage.

One way to test whether people are in fact “rational” about their addictions, Hussam says,is by looking at how changes in the future cost of the behavior affect them today. For example, if a rational addict learns that taxes on cigarettes are going to double in six months, she may be less likely to take up smoking today.

Hussam remains agnostic on whether the behavior of addicts (to cigarettes, drugs, or alcohol, for example) can be fully understood by the theory of rational addiction—“a theory that fails to explain why addicts often regret their behavior or regard it as a mistake,” she says. But she found the framework, which has historically been applied only to harmful behaviors, was useful to shift into the language of positive habits.

“Habits, after all, are like a lesser form of addiction: The more you engage in the past, the more likely you are to engage today,” she says. “And if that’s the case, do people recognize—are they ’rational’ about—the habitual nature of good behaviors? If they aren’t, it could explain the underinvestment in behaviors like handwashing with soap that we see. If they are rational, it can affect the design of interventions and incentives that policymakers can offer to encourage positive habit formation.”

The team’s experiment and findings are detailed in the paper Habit Formation and Rational Addiction: A Field Experiment in Handwashing (pdf), authored by Hussam; Atonu Rabbani, an associate professor at the University of Dhaka; Giovanni Reggiani, then a doctoral student at MIT and now a consultant at The Boston Consulting Group; and Natalia Rigol, a postdoctoral fellow at Harvard’s T.H. Chan School of Public Health.

The hand washing experiment

In partnership with engineers at the MIT Media Lab, the researchers designed a simple wall-mounted soap dispenser with a time-stamped sensor hidden inside. The sensor allowed the team to determine not only how often people were washing their hands, but also whether they were doing so before dinnertime, critical to an effective intervention. (The idea for the hidden sensors came from a scene in Jurassic World in which one of the characters smuggles dinosaur embryos in a jury-rigged can of Barbasol shaving cream.) The data gave the researchers the ability to tease apart behavioral mechanisms in a way that earlier work (which often used self-reports or surveyor observations of hand hygiene) could not do.

The researchers were also mindful about which type of soap to use in the dispensers. Through pilot tests, they found that people preferred foam, for example. “They didn’t feel as clean when the soap wasn’t foamy,” Hussam says.

And because all people in the experiment ate meals with their hands, they were turned off by heavily perfumed soap, which interfered with the taste of their food. So the experiment avoided strongly scented soap. That said, “we preserved some scent, as the olfactory system is a powerful sensory source of both memory and pleasure and thus easily embedded into the habit loop,” the researchers explain in the paper.

The experiment included 3,763 young children and their parents in 2,943 households across 105 villages in the Birbhum District of West Bengal, where women traditionally manage both cooking and childcare. A survey showed that 79 percent of mothers in the sample could articulate, without being prompted, that the purpose of soap is to kill germs.

But while more than 96 percent reported rinsing their hands with water before cooking and eating, only 8 percent said they used soap before cooking and only 14 percent before eating. (Hussam contends that these low numbers are almost certainly overestimates, as they were self-reported.) Some 57 percent of the respondents reported that they didn’t wash their hands with soap simply because “Obhyash nai,” which means “I do not have the habit,” Hussam says.

Monitoring vs. offering incentives

The researchers randomly divided the villages into “monitoring” and “incentive” villages, taking two approaches to inducing the hand washing habit. In each experiment, there was a randomly selected control group of households that did not receive a soap dispenser; altogether, 1,400 of the 2,943 households received dispensers.

“The monitoring experiment tried to understand the beginnings of social norm formation: whether third-party observation through active tracking by surveyors of hand washing behavior could increase hand washing rates, and whether the behavior could become a habit even after the monitoring stopped,” Hussam explains.

Among the 1,400 households that received a soap dispenser, one group was told their hand washing would be tracked from the get-go, and that they would receive feedback reports on their soap usage patterns. Another group was told their behavior would be tracked in a few months, enabling a precise test of rational habit formation—whether people would start washing their hands now if they knew that the “value” of hand washing would increase in the future. And another group was not told that soap use would be tracked.

The incentive experiment “tried to price a household’s value of hand washing and forward-looking behavior,” Hussam says—in other words, whether financial incentives could increase hand washing rates, and whether those households would keep using soap even after the incentives stopped. In one incentive group, people learned that they would receive one ticket for each day they washed their hands; the tickets could be accumulated and cashed in for various goods and gifts in a prize catalog.

In another group, people learned that they initially would receive one ticket each day for washing their hands with soap, but that in two months they would begin receiving triple the number of tickets for every day they used the dispenser. The final group received the same incentive boost two months into the experiment, but it was a happy surprise: The group had no prior knowledge of the triple-ticket future.

“The difference … is a measure of rational habit formation,” Hussam explains. “While one household is anticipating a change in future value of the behavior, the other household is not; if the first household behaves differently than their counterpart in the present, they must recognize that handwashing today increases their own likelihood of handwashing in the future.”

A clean victory

The results showed that both monitoring and monetary incentives led to substantial increases in hand washing with soap.

Households were 23 percent more likely to use soap if they knew they were being monitored. And some 70 percent of ticket-receiving households used their soap dispensers regularly throughout the experiment, compared with 30 percent of households that received the dispensers without incentives.
Importantly, the effects continued even after the households stopped receiving tickets and monitoring reports, suggesting that handwashing with soap was indeed a developable habit.

More importantly, the experiment resulted in healthier children in households that received a soap dispenser, with a 20 percent decrease in acute respiratory infections and a 30 to 40 percent decrease in loose stools on any given day, compared with children whose households did not have soap dispensers. Moreover, the children with soap dispensers ended up weighing more and even growing taller. “For an intervention of only eight months, that really surprised us,” Hussam says.

But while it appeared that handwashing was indeed a habitual behavior, were people “rational” about it? Indeed they were, based on the results of the monitoring experiment.

“Our results are consistent with the key predictions of the rational addiction model, expanding its relevance to settings beyond what are usually considered ‘addictive’ behaviors,” the researchers write.

In the incentives group, the promise of triple tickets didn’t affect behavior much, but, as Hussam notes, that may have been because the single tickets were already enough to get the children their most coveted prize: a school backpack. “Basically, we found that getting one ticket versus getting no tickets had huge effects, while going from one to three did little,” she says.

“Wherever we go, habits define much of what we do”

But in the monitoring group, handwashing rates increased significantly and immediately, not only for those who were monitored but also for those who were simply told to anticipate that their behavior would be tracked at a later date. “Simply knowing that handwashing will be more valuable in the future (because your behavior will be tracked so there’s a higher cost to shirking) makes people wash more today,” Hussam says.

This, Hussam hopes, is the primary takeaway of the study. While the experiment focused on a specific behavior in/among a specific area of India, the findings may prove valuable to anyone who is trying to develop a healthy addiction—whether it be an addiction to treating contaminated drinking water and using mosquito nets in the developing world, or an addiction to exercising every day and flossing every night in the developed world.

“Wherever we go, habits define much of what we do,” Hussam says. “This work can help us understand how to design interventions that help us cultivate the good ones.” 

View at the original source

People Have an Irrational Need to Complete 'Sets' of Things. 01-05

People are irrationally motivated to complete arbitrary sets of tasks, donations, or purchases—and organizations can take advantage of that, according to new research by Kate Barasz, Leslie John, Elizabeth Keenan, and Michael Norton. 

Here’s a tip for persuading people to finish more tasks, buy more products, or donate more money: Simply present assignments, requests, or items as arbitrary sets, rather than as individual units.

New research reveals that people are irrationally but effectively motivated by the idea of completing a set, even if it means working harder or spending more money—with no additional reward other than the satisfaction of completion and the relief of avoiding an incomplete set. Imagine arriving at your boss’s summer BBQ and presenting her with five beers in a box designed to hold six. No matter that your favorite craft beer store permits you buy bottles one at a time. Chances are you’d still buy six, just to fill all six spaces in the box.

“People really don’t like to leave things incomplete,” says Kate Barasz, an assistant professor of marketing at IESE Business School and lead author of the paper “Pseudo-Set Framing,” written while she was a doctoral student at Harvard Business School. The term “pseudo-set” refers to the idea that the set is kind of arbitrary—manufactured for the sole purpose of creating the idea of wholeness.

“People really don’t like to leave things incomplete”

Do you want customers to refer more of their friends to your company’s website? Ask them to refer friends in arbitrary “batches” of five at a time. Looking to increase charitable giving to your nonprofit organization? Ask potential donors to contribute a set of six gifts. Are you and your fiancé struggling to write thank-you cards for all those wedding shower gifts? Try batching the unwritten cards into sets of eight. Rather than feeling overwhelmed by the prospect of writing one note at a time, you’ll feel oddly motivated to finish a whole set at a time.

Appearing in a forthcoming edition of Journal of Experimental Psychology: General, “Pseudo-Set Framing” was co-written by Barasz; Leslie John, the Marvin Bower Associate Professor at HBS; Elizabeth Keenan, an assistant professor at HBS; and Michael Norton, the Harold M. Brierley Professor of Business Administration at HBS.

The Canadian Red Cross puts pseudo-sets to the test

The researchers proved the efficacy of pseudo-set framing through a series of laboratory and real-world field studies.

In one study, they teamed up with the Canadian Red Cross, a humanitarian charitable organization, to find out whether pseudo-set framing could influence gift-giving behavior during its 2016 holiday online fundraising campaign.

More than 7,000 potential donors were randomly (but evenly) directed to one of three landing pages.

The first page emphasized cash donations.

The second page emphasized specific gifts over cash donations. This page also included an image of a globe. For each new item added to the donor’s online cart, a location marker would appear in a particular geographic region, signaling that the item would be donated to that part of the globe.

The third page invited donors to give one of each of six items in order to complete a so-called “Global Survival Kit”—in other words, a pseudo-set. This page had a globe on it, too, but instead of location markers, it featured a line that grew closer to circumnavigating the globe each time an item was donated.

The rationale: “Who wants to donate six blankets, when you can donate one blanket and feel just as good?” Barasz says. “But, if you frame it as a set, then there is a reason to want to complete the set and to donate all six of the items.”

The results of the field study were stark. Among those who chose to give gifts, 21 percent of those in the “Global Survival Kit” condition chose to donate all six items, compared with just 5 percent in the “gift” condition and 3 percent in the cash condition.

“The strength of the increase was a really nice surprise,” says Doug Wayne, director of national digital marketing and web strategy at the Canadian Red Cross, who decided to collaborate with the research team after meeting Norton through a colleague. “Ultimately, it speaks to how powerful that framing is.”

People incur the cost of a bad gamble just so they can complete a pseudo-set

In fact, the human drive for completion is strong enough that people will strive to complete arbitrary sets even when there’s a risk associated.

In another study, 201 participants had the opportunity to accept up to four online gambling opportunities, with the chance of winning up to 25 cents. (The stakes were notably low—the online equivalent of nickel slots.)

The chances of winning decreased with each successive gamble, and participants could stop and cash out at any time. Gamble 1 offered a 90 percent chance of winning a nickel and a 10 percent chance of winning nothing, Gamble 2 offered a 75 percent chance of winning, and Gamble 3 a 50 percent chance. In the first three gambles, there was no chance of incurring a loss. But Gamble 4 offered a 50 percent chance of winning a nickel and a 50 percent chance of losing a dime.

The odds were stupid. It made no rational sense to take that last gamble. And yet….

The researchers rigged the system so that all participants won the first three gambles, such that they’d all be facing the final risk having accrued 20 of the possible 25 cents. Everyone saw their successive winnings displayed both numerically and graphically on screen.

However: Half of the participants saw a visual display consisting of five nickels—with separate blank circles depicting money not yet earned. The other half saw a single quarter, divided into fifths such that unearned money was depicted as a missing piece.

Overall, 29 percent of participants in the single-quarter condition chose to accept all four gambles, compared with 16 percent in the five-separate-nickels condition. For them, the need to complete that picture of a quarter seemed to supersede their rational knowledge of the bad odds.

“People persist with completing pseudo-sets even when it’s costly for them to do so,” John says. “That, to me, is especially compelling as a researcher—that completing this totally arbitrary set is so motivating to people that they are willing to participate in an obviously bad bet.”

Future research and advice for managers

The researchers acknowledge that it’s possible for a pseudo-set to backfire. For instance, a person who might have given seven items to the Red Cross might decide to give a single set of six items instead. And a badly designed pseudo-set could prove annoying or demotivating—say, if the arbitrary set comprises 200 parts. “If the number of tasks required to fill a ‘pie piece’ is prohibitively high, people may decide not to engage at all to avoid anticipated dissatisfaction with partial completion,” the authors write in “Pseudo-Set Framing.”

Future research may investigate the ideal size of a pseudo-set in any given situation. In the meantime, Barasz offers this rule of thumb, especially with regard to encouraging people to complete repetitive tasks: “My advice to a practitioner would be to find out, on average, how many people usually complete, and then make your set slightly larger than that,” she says.  

View at the original source