The Hotel Market in Israel

This study evaluates the long-term connections between the supply of hotel overnights in Israel and the demand for them. The empirical analysis is based on a theoretical framework that includes equilibrium between hotels and consumers operating under competitive conditions. The consumer groups in the model––Israelis and foreign tourists—differ from each other in their sensitivity to the rates for overnights and to terrorism, and in their preferences for making purchases close to the consumption date, in contrast to making advance reservations. The empirical estimate takes into account the simultaneous connections between the supply and demand in the market, and the contrasting preferences of the consumer groups. For the first time we test the effect of terrorism on the sensitivity of foreign tourists' demand to overnights rates. The difference between Israelis and tourists in the factors affecting the demand for overnights plays a key role in explaining the gap between the rates for the two groups: during the period for the study (the first quarter of 1997 through the fourth quarter of 2009), foreign tourists paid an average of about 8% more than Israelis for hotel overnights in Israel. The results of the estimation show that demand from Israelis for overnights is more sensitive to the rate for overnights than the demand from tourists. On the other hand, it was found that the sensitivity to the security situation of Israeli overnights was significantly less than that of the tourists. As expected, the demand from tourists for overnights was affected by the real shekel exchange rate and their vacation costs for alternative destinations. The demand from Israelis for overnights was affected by the per capita income in Israel and the costs of overseas vacations for Israelis. In scenarios based, among other things, on the elasticity found in the empirical estimate and on reasonable assumptions concerning stability in the security situation, for example, it was concluded that the current hotel room capacity of about 47,000 rooms should be increased by 6,000-9,000 rooms over the next five years.