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Examining the determinants of room rates for hotels in capital cities: The Oslo experience
Christer Thrane Received (in revised form): 7th November, 2006
Department of Social Sciences, Lillehammer University College, 2626 Lillehammer, Norway. Tel: 47 61 28 82 47; Fax: 47 61 28 81 70; E-mail: Christer.Thrane@hil.no

Christer Thrane is Professor of Tourism in the Department of Social Sciences at Lillehammer University College, Norway. His research interests include, among other things, quantitative research in the areas of tourism, hospitality and recreation. The author would like to thank Jo Kleiven and the anonymous reviewers for valuable comments to an earlier draft of this paper and Tone Kvamme and Guro Larsson for excellent research assistance. The usual disclaimer applies.

ABSTRACT KEYWORDS: hotels, Oslo, room rates, price hedonics, SUR

Price hedonic theory states that the price for a product may be thought of as an additive function of the various utility-bearing attributes embedded in the product. Within this framework, the present study demonstrates how the room rates for hotels in and around the Norwegian capital of Norway can be linked to certain hotel attributes. Seemingly unrelated regression (SUR) models incorporating nine hotel attributes explain about 70% of the variation in room rates. Of particular importance in this respect, are the attributes mini-bar, hairdryer, free parking and distance to downtown.
Journal of Revenue and Pricing Management (2007) 5, 315323. doi:10.1057/palgrave.rpm.5160055

INTRODUCTION It is common knowledge that the prices people have to pay for accommodation in hotels vary enormously. Furthermore, most people probably possess a more or less accurate intuition of

what causes room rates to diverge. In this respect, the multidimensional concept of quality is expected to be associated with hotel prices in a more or less linear fashion: a higher quality equals a higher price. In other words, price differences between hotels signal quality differences between hotels. In a related manner the presence or absence of various hotel attributes (eg, a spa, a restaurant, a central location etc.) will be among the factors that most people will expect to inuence hotel room prices. In addition, it stands to reason that lodging in hotels possessing many desirable attributes will be more expensive than lodging in hotels in which few or no such attributes are present. This paper is concerned with the prices consumers pay for staying in the various hotels in the proximity of the Norwegian capital of Oslo. In particular, it examines how a number of these hotels attributes explain variation in the room rates for single and double rooms. The theoretical foundation for this research question is found in the price hedonic literature. In general terms, the results of price hedonic studies may have important implications for consumers who want to compare the marginal utility of different product attributes. As such, the results shed light on which (hotel) attributes they have to pay extra for and which (hotel) attributes can be bought without a price surcharge. The ip side of this, however, is that the ndings also can be used by the hospitality industry to enhance their strategic pricing.

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THEORETICAL FRAMEWORK AND PRIOR RESEARCH Price hedonic theory states that the price of a product can be regarded as a function of its immanent attributes or characteristics (Lancaster, 1966; Rosen, 1974). Typical applications of the theory involve the price of residential properties (Fujita, 1989), whereas more esoteric applications concern that of Bordeaux wine (Combris et al., 1997). In the case of residential properties, the sale price of a house can be regarded as an additive function of its size, number of rooms, amenities, neighbourhood quality and proximity to key institutions. By the same logic, a wines district of production, vintage and subjective quality (assessed by taste panels) will to a large degree determine its sale price. In other words, hedonic price analysis assumes that the price of a product or a service is a function of a bundle of attributes. A few studies with a focus on the determinants of hotel room prices or room rates have adopted the framework described above, albeit to varying degrees. Carvell and Herrin (1990) showed that price variations among hotels in San Francisco were attributable to features such as location and other hotel characteristics. In a similar vein, Bull (1994) scrutinised how certain locational and site-specic attributes affected motel room prices in Ballina, Australia. The small number of hotels/motels included in these studies (20 and 15, respectively), however, precluded any certain generalisations. Wu (1998) examined whether chain-associated motels in Arkansas and Kansas were more expensive to stay in than their non-chained counterparts. More recently, Israeli (2002) studied how hotel room prices in Israel were inuenced by hotels star rating, number of rooms and corporate afliation (ie, chain association). In a related manner, White and Mulligan (2002) demonstrated how attributes such as presence of a pool and a spa, as well as climatic and locational features, affected the hotel room rates in four southwestern US states. Using the same approach, Monty and

Skidmore (2003) scrutinised how a number of hotel attributes could be linked to room rates for a local US market. Finally, Coenders et al. (2003) examined how hotel room prices in the sun-and-beach segment in the Mediterranean region were inuenced by a number of hotel attributes. In a related spirit, a number of papers have sought to determine how prices for (allinclusive) package holidays are affected by hotel characteristics and related features (eg, Sinclair et al., 1990; Aguilo et al., 2001, 2003; Papatheodorou, 2002; Espinet et al., 2003; Thrane, 2005). Also, Roubi and Litteljohn (2004) developed a regression model within a price hedonic framework to explain the variation in sales prices for hotel properties sold in the UK between 1996 and 2002.
THE PRESENT STUDY Based on the general ideas embedded in price hedonic theory and its prior hospitality and tourism applications, there is ample evidence to suggest that the presence or absence of certain hotel attributes affect the room rates faced by consumers when they make their decisions regarding hotel accommodation. Formally, the determinants of the room rate (R) a consumer must pay for a hotel stay is a function of various objective hotel attributes (O) (eg, type of board; distance to downtown; presence of swimming pool, bar and restaurant etc.) and, possibly, more subjective attributes (S) (eg, service quality; hotel star rating; atmosphere etc.). Accordingly, the room rate for the ith hotel stay (Ri) can be described as Ri P(Oi, Si) where both Oi and Si are vectors of attributes. Ordinary Least Squares (OLS) regression or the related log-linear form have in prior hospitality or tourism applications mostly been used to estimate this type of hedonic price model. As there exists no ofcial star-rating classication for the hotels that make up the data in this study, the subsequent analysis focuses solely on objective attributes. At rst glance this might appear as a limitation because most

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previous scholars have included both star rating and objective attributes in their price hedonic regressions. However, as argued by Papatheodorou (2002) and Thrane (2005), using star rating as an independent variable alongside objective attributes amounts to a specication error because star rating is an endogenous independent variable. The simple reason for this is that the star rating variable becomes a function of objective attributes to a substantial degree, in much the same sense as price. Another problem that arises with this procedure is that it likely will cause multicollinearity in many cases (ie, high correlations between the independent variables). Thus, the lack of an ofcial star rating classication for the hotels in the data does not create problems in the present context. In summary, prior research has clearly demonstrated that the prices faced by consumers in their choice of accommodation depend on the attributes embedded in the lodging facilities. In line with this research the purpose of the present study is to examine the relationships between a number of hotel attributes and room rates in and around the Norwegian capital of Oslo.
Data The data for this study were extracted from the Internet-based search engine for hotels in Norway in March 2005 (www.hotell.no). Originally 88 hotels came up on this list. Seven of these lodging premises could, however, not be classied as hotels and were therefore discarded from the sample. Furthermore, because an important aspect of hedonic price modelling is to make sure that the data are homogenous enough to make relevant comparisons, seven more hotels that could be classied as either very inuential cases or as outliers were deleted from the sample. Thus, the present analysis is restricted to 74 hotels. Arguably these data come closer to a population than to a sample. Nevertheless, the use of signicance tests was deemed appropriate in the statistical analysis since there were few obvious

reasons for why the data could not be envisioned as a random sample from a universe of hypothetical cases (Henkel, 1976). The two dependent price variables in the study were the weekday rates in March 2005 for a one-night stay in a single or a double room. It is important to note that these room rates do not necessarily reect the price consumers actually pay because stays booked a long time in advance usually are bought at discount prices. As the hotels or hotel chains set their prices in advance, however, they signal hotel quality. For this reason it is unproblematic to use these price-proposals as dependent variables within a price hedonic framework (cf. Israeli 2002; Papatheodorou 2002). Table 1 presents descriptive statistics for these dependent variables, both in level and logged form. Table 1 also presents descriptive statistics for the attributes or independent variables considered in the study. One particular problem with price hedonic theory is that it offers few theoretical guidelines for selecting independent variables (Andersson 2000). The selection of independent variables in the present context was based on the research cited above, and in particular on the list of relevant attributes compiled by Espinet et al. (2003). The information about the attributes were mostly gathered from the various hotels websites, but in some instances obtained through phone calls. It should be mentioned that the attributes considered in this study also included the features that are regularly quality-tested in Norways leading nancial newspaper, Dagens Nringsliv (DN). Two attributes TV in hotel room and Internet access where present in 72 out of the 74 hotels. As these two attributes for all practical purposes came close to being constants, they were not included among the independent variables/ attributes in the analysis. It should be noted that the mean values of the binary independent variables in Table 1 indicate the proportion in the data where the attribute of interest is present.

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Table 1: Descriptive statistics for study variables (N=74) Variable Description of variable/attribute Mean Standard deviation 295.8 360.9 0.331 0.306 0.394 0.431 0.383 0.503 0.480 0.371 0.476 14.64 191.5

RSING RDOUB LogRSING LogRDOUB CHAINa MINIBARa POOLa PARKFREEa RESTAUa HAIRDRYa ROOMSERVa DIST BEDS
a

Room rate per night for single room (NOK) Room rate per night for double room (NOK) RSING, logged RDOUB, logged Hotel is associated with a chain (yes=1) Mini-bar is present in hotel room (yes=1) Pool is present in hotel (yes=1) Free parking space is present in hotel (yes=1) Restaurant is present in hotel (yes=1) Hairdryer is present in hotel room (yes=1) Room service is present in hotel (yes=1) Distance in kilometers to Oslo Central Station Number of beds in hotel

1001 1247 6.86 7.08 0.810 0.757 0.176 0.500 0.649 0.838 0.338 11.89 257.7

Indicates a binary variable (ie, an attribute). The mean value refers to the proportion in the data where the attribute of interest is present.

Estimation Most previous price hedonic research has followed Rosens (1974) original advice and used the log-linear specication instead of the linear one. Following convention, therefore, the natural logarithms of the two room rates were used as the dependent variables in this study. An additional advantage of the log-linear form compared to the linear, is the former techniques ease of interpretation. In general log-linear regression coefcients can be interpreted as the percentage change in the dependent variable associated with a one-unit increase in the independent variable. Unfortunately, dummy coefcients and large coefcients (ie, coefcients >0.20) do not permit this straightforward interpretation. In this case, the percentage difference between the characteristic of interest and the reference category is obtained by taking the antilog of the coefcient minus 1 (Halvorsen and Palmquist, 1980). A priori it was expected that the two dependent price variables in this study were likely to be correlated. In such instances, a joint estimation of the two regression equations is

superior compared with two sequential OLS regressions in terms of obtaining statistical efciency (Zellner, 1962). Thus, the estimation of the two regression equations was carried out by means of Zellners seemingly unrelated regression (SUR) approach. Another advantage of the SUR technique is that it permits testing for signicant differences in regression coefcients between the two equations.
Results The results of Table 1 show that the mean rate for a one-night stay in a single room is 1,001 Norwegian crowns (NOK). The similar rate for a double room is 1,247 NOK (as of 11 May 2005, 1,000 NOK was the equivalent of 80.09 h). The respective median values are 1,000 and 1,250 (results not shown). The bivariate correlation between the two price variables is 0.89 (Po0.01). In other words, the rate differences between single and double rooms are fairly constant for the hotels in question. Table 2 shows how the two room rates are affected by the various attributes listed in Table 1.

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Starting with the single room rates (ie, LogRSING), we see that the room rates in hotels associated with chains are about 15% more expensive than the room rates in nonchained hotels, ceteris paribus. Similarly, the rates for rooms that include mini-bars are about 39% higher than the rooms not offering this facility (exp. (0.329)1 0.389). Also, room rates in hotels where free parking is available are about 19% higher than they are in hotels that do not provide such a service, whereas hairdryers in hotel rooms drive up the room rates by 44% compared with rooms where hairdryers are not available (exp. (0.364)1 0.439). Finally, room rates are, perhaps somewhat surprisingly, about 12% lower in hotels offering room service than those that do not provide this feature. The following attributes have no effect on the rates for single rooms: presence of swimming pool in hotel (POOL), presence of restaurant in hotel (RESTAU), distance to Oslo Central Station (DIST) and number of beds in hotel (BEDS).

As to the coefcients for double room prices (ie, LogRDOUB), we see that, contrary to the results for single rooms, a chain association does not have an effect on the rates for double rooms. By contrast, the effects of MINIBAR, PARKFREE, HAIRDRY and ROOMSERV are very similar for single and double room rates. In passing, it is also interesting to note that the effect of MINIBAR on LogRSING is signicantly larger (F 3.04, Po0.10) than the analogues effect on LogRDOUB. The greater the distance of hotels from Oslo Central Station (ie, downtown Oslo), the lower the prices for double rooms. For example, the room rate in a hotel located 30 km from Oslo Central Station is approximately 11% lower than the rate in a hotel located only 10 km from this location, ceteris paribus (0.056 2 0.112) (it is also worth mentioning that the combined effect of DIST on LogRSING and LogRDOUB is statistically signicant (F 7.58, Po0.01)). All else being equal, the room rates in larger hotels (as indicated by a greater number of beds) are a bit more expensive than

Table 2: Room rates for one-night stay in single room (logged) and double room (logged) by independent variables. Seemingly unrelated regression (N=74). Independent variable LogRSING Coefcient CHAIN MINIBAR POOL PARKFREE RESTAU HAIRDRY ROOMSERV DIST ( 10) BEDS ( 100) Constant R2 0.147* 0.329*** 0.065 0.193*** 0.005 0.364*** 0.123** 0.026 0.003 6.13*** 0.703 Standard error 0.076 0.065 0.068 0.047 0.059 0.076 0.051 0.016 0.014 0.068 LogRDOUB Coefcient 0.013 0.266*** 0.075 0.186*** 0.021 0.387*** 0.127*** 0.056*** 0.022* 6.50*** 0.705 Standard error 0.070 0.059 0.062 0.043 0.054 0.070 0.047 0.015 0.013 0.063 14.50*** 3.04* 0.804 0.794 0.613 0.584 0.896 10.90*** 5.58** 91.40*** F-test of model differences

Note: see Table 1 for variable denitions and descriptions. Breusch-Pagan test of independence between regression equations: w2 (1 df)=51.75; Po0001, *Po10, **Po05, ***Po01 (two-tailed tests).

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those in smaller hotels. For example, the room rate in a hotel with 500 beds is about 9% higher than the rate in a similar hotel with 100 beds (0.022 4 0.088). It is also worth pointing out that the effects of DIST and BEDS are signicantly different for the two regression equations (F 10.90, Po0.01 for DIST; F 5.58, Po0.05 for BEDS). Just as for the statistical explanation of LogRSING, the independent variables POOL and RESTAU have no effects on LogRDOUB. Finally, the Breusch-Pagan statistic is clearly signicant. This conrms that LogRSING and LogRDOUB are indeed correlated, and that the two regression equations are not independent of each other. In this way, the use of the SUR approach is clearly justied. Especially two attributes have pronounced effects on the rate for a stay in a double room: MINIBAR and HAIRDRY. Figure 1, which also includes the variable DIST, displays this more clearly: The room rate in a hotel located 50 km from Oslo Central Station in which neither a mini-bar nor a hairdryer are present is about 650 NOK. By contrast, the analogues room rate in a hotel situated 10 km from Oslo Central Station in which both of these accessories are present is about 1,600 NOK. In Figure 1, the remaining binary independent

1800 1600 Room rates for double rooms 1400 1200 1000 800 600 400 200 0 0 10 20 30 40 50 Distance to Oslo Central Station in kilometers
No mini-bar, no hairdryer No mini-bar, hairdryer Mini-bar, no hairdryer Mini-bar and hairdryer

variables are set to their modal values, whereas BEDS is set to its mean value (see Wooldridge (2000, p. 203204) on how to transform a logged dependent variable into a level-form dependent variable). The explained variances in both of the regression equations reported in Table 2 (R2 0.70) show acceptable model t. Yet, since the SUR regression was based on somewhat few observations, a number of diagnostic tests were carried out in order to examine the robustness of the ndings. First, insignicant RESET tests for misspecication (P>0.05 for both equations) indicated that the models lacked no important explanatory variables. Second, insignicant Breusch-Pagan tests for heteroskedasticity (P>0.05 for both equations) suggested that the variance in the data did not increase (or decrease) with price. Third, both plots (available on request) and formal tests (Shapiro-Wilk W; P>0.05 for both equations) suggested that a normal distribution for the residuals could not be rejected for any of the models. Fourth, multicollinearity is often a concern in regression models where many binary independent variables are present. As no Variance Inations Scores (VIF) exceeded 2.06 for any of the independent variables and the mean VIF-score was 1.63, multicollinearity was not a problem in the present analysis. Finally, the estimations were also carried out using the so-called robust regression procedure, and the results were similar to the reported ones. Thus, the results of these tests were all satisfactory.
DISCUSSION AND CONCLUSION During the last 15 years a number of hospitality and tourism studies have been concerned about how the utility-bearing attributes embedded in lodging facilities are associated with the overall price for such products. The theoretical framework for these studies has generally been the seminal work by Rosen (1974) on price hedonic theory. In general the results of this type of research tell consumers which attributes they have to pay extra for, which attributes

Figure 1: Room rates for double rooms by three hotel attributes

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result in discount, and which attributes do not affect the price. At the same time, however, the providers of hospitality and tourism products may use such results as a means for strategic pricing. The ambition of the present research has been to examine how certain hotel attributes are related to the room rates for single and double rooms in the region surrounding Norways capital, Oslo. Most of the ndings of this study have been in general accordance with previous studies. However, some results were also unexpected. Below follows a recapitulation of the main ndings and some comments in this regard. The two most important attributes in terms of explaining variance in room rates were the presence or absence of the amenities mini-bars and hairdryers, as Figure 1 displays. It is also interesting to note that these two attributes are the only ones that refer to the actual hotel rooms, and not to the hotels themselves. While the effect of hairdryers must be considered as a novel feature of this study, Aguilo et al. (2001, 2003) also observed the effect with respect to mini-bars. The next interesting question to ask is whether or not consumers have the opportunity to choose between hotels that do, or do not, offer these amenities in their rooms. In other words, do consumers have real choices as regards saving money by choosing a hotel that does not offer these facilities? A quick glance at the data suggests that consumers for most practical purposes face such a choice to a somewhat limited degree, since as many 76 and 84% of the hotels in the data offer, respectively, mini-bars and hairdryers in their rooms. Free parking was another attribute with a noticeable effect on room rates in this study. In all, 50% of the hotels in the data offered this facility, so in this regard consumers have a real choice as to saving money if they want to. However, further analysis (results available on request) showed that presence of free parking was more frequently associated with hotels

located farther away from Oslo downtown (ie, Oslo Central Station). Espinet et al. (2003) also found that parking was associated with hotel room prices. Variables measuring aspects of location have in most of the prior research shown predictive ability with respect to lodging prices (Bull, 1994; White and Mulligan, 2002; Monty and Skidmore, 2003; Thrane, 2005). In this study, a locational effect was supported in the sense that longer distances to Oslo Central Station (ie, downtown Oslo) were associated with less expensive room rates (cf. Figure 1). Prior studies have also found that hotels associated with a hotel chain (ie, corporate afliation) charge higher room rates than hotels with no such associations (Wu, 1998; Israeli, 2002). The results of this study partially supported this notion, as a chain-association only affected the room rates in the expected way for single rooms. Another novel, and to some extent unexpected, result of this study was the effect of room service on room rates. In this respect, the room rates in hotels offering room service were about 12% less expensive than similar rates in hotels not providing this service. At this point, the question of why this pattern was observed is only a matter of speculation. A preliminary conjecture would be that hotels offering room service anticipate that the income generated by this service will likely compensate for the lower room rates. In addition, lower room rates will by themselves likely attract more customers. Obviously, however, more research is needed before any certain conclusions can be drawn in this regard. The following attributes did not appear to have a bearing on room rates in any of the models: presence of swimming pool, presence of restaurant and, for all practical purposes, hotel size (ie, number of hotel beds). As these characteristics have all been identied as salient in many prior studies, the lack of these associations also beg an explanation. Based on the reasonable assumption that the hotels analysed in this study are characterised by a

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stronger element of business stays than the ones analysed in previous research (which has had an orientation towards vacation settings), a qualied guess could be that these attributes are simply more relevant to the vacation travel market. Some differences between the regression models for single and double room rates were found. One possible explanation for the divergences between the two regression models results could be that the ratio between single and double room offerings varies among the hotels in the data. Another possibility is that these differences could reect that hotel or hotel chain directors have different anticipations as regards the demand for single or double rooms. Future research should address this more carefully. This study suffered from two main limitations. First, the analysis was based on a limited number of observations. Nevertheless, the explanatory power of this studys multivariate models was in line with most previous research. Furthermore, a number of diagnostic tests revealed no problems with the model specications. The second limitation, which is more severe, was related to the possibility for generalisations to hotel areas around other capitals. A priori it is difcult to have an informed opinion in this regard; this is something future research should shed more light on. In conclusion, this study has within a price hedonic framework examined how certain hotel attributes are related to the room rates in and around Norways capital, Oslo. Using a seemingly unrelated regression (SUR) technique, a number of associations between hotel attributes and room rates were observed. In particular, room amenities such as mini-bars and hairdryers drove up the room rates in the same way as free parking. Furthermore, a location close to downtown Oslo meant that consumers must pay more for hotel accommodation. By contrast and somewhat surprisingly, the room rates in hotels offering room service were lower than the rates in hotels not providing this service.

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