Demand Volatility, Adjustment Costs, and Productivity: An Examination of Capacity Utilization in Hotels and Airlines

64 Pages Posted: 4 Nov 2016 Last revised: 31 May 2017

Date Written: February 16, 2017

Abstract

Measures of productivity reveal large differences across producers even within narrowly defined industries. Traditional measures of productivity, however, will associate differences in demand volatility to differences in productivity when adjusting factors of production is costly. I document this effect by comparing the influence of demand volatility on capacity utilization in a high (hotels) and low (airlines) adjustment cost industry. Differences in annual demand volatility explain a large share of the variation in occupancy rates of hotels at the metro area-segment-year level. In contrast, differences in annual demand volatility have no effect on load factors of airlines at the destination-airline-year level.

Keywords: productivity, demand volatility, adjustment costs, capacity utilization, occupancy rates, load factors, hotels, airlines

JEL Classification: D24, L83, C43

Suggested Citation

Butters, R., Demand Volatility, Adjustment Costs, and Productivity: An Examination of Capacity Utilization in Hotels and Airlines (February 16, 2017). Kelley School of Business Research Paper No. 16-72. Available at SSRN: https://ssrn.com/abstract=2863924 or http://dx.doi.org/10.2139/ssrn.2863924

R. Butters (Contact Author)

Indiana University ( email )

1309 E. Tenth St.
Bloomington, IN 47405
United States

HOME PAGE: http://https://kelley.iu.edu/BEPP/faculty/page14113.cfm?ID=46947

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