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.” 

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Asking Questions Can Get You a Better Job or a Second Date 01-05

Knowing how to keep a conversation going can improve your career as well as your social life, according to research by Alison Wood Brooks and colleagues. 

New research suggests that people who ask questions, particularly follow-up questions, may become better managers, land better jobs, and even win second dates.

“Compared to those who do not ask many questions, people who do are better liked and learn more information from their conversation partners,” says Alison Wood Brooks, assistant professor and Hellman Faculty Fellow at Harvard Business School. “This strategy does both. It’s an easy-to-deploy strategy anyone can use to not only be perceived as more emotionally intelligent, but to actually be more emotionally intelligent as well.”

The research, published in the paper It Doesn’t Hurt to Ask: Question-Asking Increases Liking (pdf), examined data from online chats and face-to-face speed dating conversations. In addition to Brooks, the coauthors were Karen Huang, HBS and Department of Psychology, Harvard University; Michael Yeomans, Institute for Quantitative Social Science, Harvard University; Julia Minson, Harvard Kennedy School; and Francesca Gino, Harvard Business School. It was published in September’s Journal of Personality and Social Psychology. 

“Follow-up questions are an easy and effective way to keep the conversation going and show that the asker has paid attention to what their partner has said”

The first two studies in the paper examined more than 600 online chat participants tasked with getting to know each other. A third study consisted of 110 speed-daters engaged in round-robin dates—over 2,000 conversations.

In all three studies, those who asked follow-up questions were better liked than those who didn’t. “Follow-up questions are an easy and effective way to keep the conversation going and show that the asker has paid attention to what their partner has said,” the researchers write.

Researchers study 2,000 conversations

In the first two studies, people were assigned a random partner and told to chat for 15 minutes in order to get to know each other. In the first study, one person in each pair was told to ask at least nine questions or at most four questions, and the other person was unaware of his or her partner’s question-asking instructions. In the next study, both people in each pair were told to ask many (at least nine) or few (at most four) questions.

Nine research assistants read through a sample of 368 transcripts and identified question types. They discovered and hand-labeled six different types of questions: introductory, mirror, full-switch, partial-switch, follow-up, and rhetorical questions. Forty-four percent of the questions—more than any other type—were follow-ups.

Based on the hand-labeled question types, the research team was able to create its own machine learning algorithm, natural-language-processing software to analyze the speed dating conversations. For the third study, armed with their algorithm, they examined data from a 2013 Stanford speed dating study called Detecting friendly, flirtatious, awkward and assertive speech in speed dates (pdf) as a way to test in-person interaction.

And there, perhaps, was revealed the ultimate proof that follow-up questions work. The top third of question askers got the most second dates. Researchers found that if a participant were to ask just one more question on each of the 20 dates, he or she would succeed in getting a “yes I want to see you again” on one more of the dates, on average.

Be careful, though. Asking too many questions can have the reverse effect, the research shows. “Asking a barrage of questions without disclosing information about yourself may come across as guarded, or worse, invasive,” Brooks says.

Brooks, who has been fascinated by “why people don’t ask more questions” since grade school, has mulled over this topic in many discussions with her mother, whom she thanks in the study. “My mom, a talented natural psychologist, and I would often reflect on why people don’t ask more questions. What holds them back?”

One reason might be ego. People may be so focused on sharing what they know that they aren’t considering what they might learn from others. Or, they may think to ask a question, but are afraid of asking one that is perceived as rude, intrusive, or incompetent.

But, there’s a third, darker reason. Potential questioners, such as a manager, may not ask because they don’t care about the answers—they may feel apathy or disinterest in what the other person has to say.

“This type of apathy is often misplaced—we have much to learn from others, perhaps especially from those lower in status than ourselves,” Brooks says.

“Every workplace has norms and rules of conduct, explicit and implicit. There are rules of appropriateness. And rules of professionalism,” Brooks says. “It is possible that we are more likely to make conversational mistakes at work and violate these rules and norms and expectations.”

A job interview is one circumstance that may benefit from asking more questions. For example, standard practice suggests that a potential new boss is expected to do the asking. But asking more questions as a job candidate may show how much you can contribute in a potential job, that you are an engaging listener with high emotional intelligence. Plus, the manager may like you more.

“We don’t have many evidence-based prescriptions about what you can do to become more emotionally intelligent or to take other people’s perspectives,” Brooks says. "In fact, there’s research that shows even if you tell people, ‘try to put yourself in other person’s shoes,’ we aren’t very good at it.”

The right way to question

For those who aren’t natural question-askers, Brooks recommends heading into any conversation with an explicit goal of asking questions.

“Think to yourself, I need to ask at least five questions in this conversation, or, I need to ask questions in this conversation, listen to the answers, and ask follow-up questions. It’s easy to do, and—even better—requires almost no preparation.”

The researchers are interested in looking at other areas, now that they’ve established a link between question-asking and liking.

Potential areas include:

What happens in extreme situations when someone asks zero questions, or, when they ask 50?

What can be gleaned about gender, status, age, or personality from question-asking in conversation?

What can be learned from groups in terms of productivity or happiness when it comes to question asking? 

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