The heart of every economic theory is some kind of modeling. Models provide a logical and abstract stencil to comprehend a complex phenomenon, and they help the economists in many ways. For example, model makes it possible to isolate logically and sort out complex cycles of cause and effect relations that interact in the economy. The four basic market models are one of the prominent tools in economics. They are; pure competition, monopolistic competition, oligopoly and monopoly. Each of the market models has its own characteristics; depending on the nature of the product and the firm, the company can decide to enter a specific kind of market.
The present economic estimation is done on the hotel Hyatt Regency of Ludhiana. It is claims as the first international five star hotels in Ludhiana, which is strategically located near to Chandigarh-Ferozepur National Highway No. 95 (Hyatt Regency, 2014). It is close to prime residential areas and adjacent to modern Malls. The hotel has 168 ornate and spacious guestrooms, including 26 suites, ranging in size from 409 sq ft to 1,981 sq ft. Two dedicated floors with complete business facilities cater to the collateral needs of guests and a Club Lounge serves breakfast and evening cocktails.
Market Model for Hyatt Ludhiana
Hotel is a business that satisfies the needs of its customers (termed as Guests) through rooms for accommodation and supply of food & beverage. It also provides amenities such as, transportation, laundry & dry-cleaning, concierge, communication services, spa, swimming pool, health club, etc. The guests in the hotel include tourists, corporate managers, family guests, event organizers, etc.
The market model suited for Hyatt Regency is “oligopoly”. Though this hotel is the first of its kind in Ludhiana and it now enjoys a monopoly in the segment, other such hotels are likely to come looking at the performance of Hyatt Ludhiana. The reasons for choosing ‘oligopoly’ as the most suited market model for Hyatt are, in Ludhiana there is space only for few five star hotels, some of the services and experiences at Hyatt is very differentiated and some are standard, the capital investments required to build and operate a hotel such as Hyatt is very high, and small players cannot come into this segment (Farris, Paul W.; Neil T. Bindle; Phillip E. Pfeifer; David J. Rubinstein , 2010).
Defining the Q
In a business, it is important to have an idea about the expected sales. For estimating how much sales a company will make, demand estimation is the process that is used. A company can estimate how much to produce, how much to stock and make other important decisions with the help of demand estimation. Demand estimation is the process of arriving at an estimate for the demand of the product or service that is offered. Demand is for a period such as day, week, month, season, quarter or year. Q is the quantity with respect to demand.
In the case of Hyatt at Ludhiana, there are two Q the hotel can produce. One, the occupancy of the rooms and second, the consumption of food and beverages. In a hotel about 90% of the revenue comes from these two i.e. room occupancy and F&B. The total rooms available with Hyatt Ludhiana is 168 (twin occupancy) and the hotel can serve about 1380 guests at a time (one meal) through restaurants and banquet halls.
Estimation of the Q
Q is the quantity in the demand curve. The demand curve is a graphical representation as a straight line. The linear formula used to calculate Q is, Q = a – bP where a and b are limitations. The constant “a” signifies all factors other than price that affect demand. The constant “b” is the slope of the demand curve and shows how the price of the product / service affects the quantity demanded. P is the price of the product / service.
Since the Hyatt Regency is in the oligopoly market, conventional demand curve may not be applicable. Because 60 % of the customers to five star hotels are business guests and the presence of industries around the Ludhiana town, the chances of getting customers to Hyatt is very high. There are about 100 large industries and about 500 medium sized industries in Ludhiana, that can be a captive market for Hyatt (that too without competition). Another important point to be noted here is that five star hotels have the characteristics of Veblen Goods. The customers may pay more to get the service of the hotel; hence the effect of price elasticity may not be significant (Chao, A.; Schor, J. B., 1998). The expected Q may not be achieved if the visitors to the city decreases. Though there is no substitute service to five star hotels, the advances in communication technologies are potential factors that can affect the Q of the Hyatt.
Estimation of Cost
Cost curves are drawn with the quantity of a specific product (quantity) along the horizontal axis and money cost on the vertical (Boyd, L. A. and D. W. Boyd, 1994).
The above graph is a short run curve indicating marginal curve, average total cost, average variable cost and average fixed cost. Cost for Hyatt Ludhiana is from payroll expenses, Cost of sales, variable costs (heat, light, & power) and fixed costs such as maintenance / establishments. For Hyatt, with respect to room occupancy, the fixed cost, variable cost and marginal would tend to decrease as the room occupancy increases, but in the case of F & B, the marginal cost might substantially increase as the number of guests increases. If the room occupancy does not reach the expected level of consumption, it will have unfavourable effect on average fixed cost. Similarly, if the F & B guests visit the hotel more than the capacity , marginal costs would increase (Jeremy Greenwood, Zvi Hercowitz & Gregory W. Huffman 1988). Changes in prices can have substantial influences on the costs of particular alternatives (as mentioned earlier) which, in turn, may affect the final choice of the hotel.
Calculation of Break Even
The total room days available with Hyatt Regency is 168 x 365 = 61320 units
Total F & B units available is 1380 x 2 x 365 = 1007400 units
Let us assume the price of Room as Rs. 9000/- that of meal Rs. 750/-
Total revenue possible is 61320 x 9000 + 1007400 x 750 = 551880000 + 755550000 =
Rs. 1307430000 (21790500 USD)
As per the industry standards let us assume that the sales is for 60 percent of the capacity, then
Sales = Rs.784458000
Fixed Costs (23%) = Rs.180425340
Variable cost (8%) = Rs. 62756640
Payroll cost (27%) = Rs. 211803660
Cost of Sales (11%) = Rs. 86290380
Contribution Margin = Sales – Variable / Sales
= 784458000 – 62756640 / 784458000 = 0.92
Break-even Sales = Fixed Costs / Contributory margin = 180425340 /0.92 = 196114500
For achieving the break even sales, the Hyatt regency must achieve sales of Rs. 196114500, which means that if Hyatt utilizes 25% of its capacity, break even is achieved. If Hyatt Regency achieves 60% capacity utilization, it will have about 20% profit before tax.
This breakeven is on the assumption that the cost of production will remain constant, and the pricing also would remain same. If there is any change in the pricing or cost, the breakeven would proportionately change.
Boyd, L. A. and D. W. Boyd (1994), ‘the Short- and Long-Run Marginal Cost Curve: An Alternative Explanation’, Journal of Economic Education, 25 (3), 261-265.
Farris, Paul W.; Neil T. Bindle; Phillip E. Pfeifer; David J. Rubinstein (2010) “Marketing Metrics: The Definitive Guide to Measuring Marketing Performance”. Upper Saddle River, New Jersey: Pearson Education, Inc.
Hyatt Regency (2014) http://ludhiana.regency.hyatt.com , Retrieved May 2014.
Chao, A.; Schor, J. B. (1998). "Empirical tests of status consumption: Evidence from women's cosmetics". Journal of Economic Psychology 19 (1): 107–131
Jeremy Greenwood, Zvi Hercowitz & Gregory W. Huffman (1988). “Investment xapacity utilization and real business cycle”, American Economic Review, 78, 402-417.