Hotels, Bar Girls and Thai Economics
There have been some comments posted recently about how stupid Thai people are. How bargirls stupidly raise their prices when demand is weak and they should be lowering them, and how Bangkok hotels are stupidly not lowering prices now during a period of slow demand due to the protests.
Let’s examine both these issues.
A typical hotel has a mix of commercial (business) and leisure (tourist) occupants. The average businessman is continuing to come to Bangkok despite the protests. If, in the rare case, a multinational company has put a temporary ban on their employees travelling to Bangkok during the current situation, a discount in hotel rates is not likely to change this policy.
For tourists, the overwhelming number of cancellations recently have come from mainland Chinese, followed to a lesser extent by Hong Kongers and Taiwanese and even less so from Japanese, Koreans and even Russians. These cancellations are due to security fears and also will not be changed by a reduction in room rates.
At this time of year, a Bangkok hotel typically has an occupancy rate of 90%+. Reports are that occupancy is down approximately 30% so let’s say current occupancy is 60%. These 60% are paying full rates. If a hotel discounts, they might get a few extra room nights, let’s say they could get occupancy up to 65%. But the 60% that had already booked would also be able to take advantage of these lower rates. All in all, the hotel would most likely lose money by reducing rates, as the extra customers they would attract would not make up for the lost revenue from their current customers.
Thai hotels today use fairly sophisticated computerized yield models that help them determine what the optimal rate to charge is in order to maximize revenue.
Now let’s turn to the bar girl who faced with lowered demand actually raises her prices.
We all know that in classical economic demand supply theory, when prices rise demand falls. This is true in most cases, but there are several instances in which the opposite is true.
One is with luxury goods. Economic analysis has shown that when the price of a luxury good rises (especially when it is difficult to assess the real value of the good), then demand also rises.
Two examples of this are high priced diamonds and artwork. For a man giving his fiancée a diamond engagement ring, the price of the diamond very often reflects his love for the woman. A man, unknowing of diamond quality, will tend to want to pay a higher price to assure himself that he is buying top quality. The same diamond, priced higher, will often generate more demand.
The same goes for artwork. A painting by an obscure Chinese artist priced at $10,000 might not generate any demand, the same painting priced at $50,000 or more generates more demand. In fact, unscrupulous agents have been known to sell the same painting multiple times among their friends, solely to drive the price up in a recorded fashion.
A second example of a higher price raising demand became famous during the Irish potato famine of 1845 – 1852. Potato was the main basis of the diet of the Irish family, supplemented by vegetables, dairy, and occasionally meat. The Irish housewife had to supply her family with a minimum number of daily calories from a fixed budget.
When the price of potatoes rose due to their scarcity because of the potato blight that ruined the crops, the housewife was faced with a dilemma. If she bought the same number of potatoes as before, the expense would eat up so much of her budget that she had no money left for vegetables or meat, and her family would not get the requisite number of calories.
Her only choice when the price of potatoes went up was to buy MORE potatoes, and less of the more expensive vegetables and meat. That way she could keep her family from starving.
Back to the bar girl (did you think I had forgotten her?).
Let’s say (this is just an example) that she has to generate 4,000 baht / week to pay her rent, buy food and send money home. This is the absolute minimum she must make. If she makes less than 4,000 baht / week she will not survive. So she charges 2,000 baht and services two customers a week.
Now, an external event happens (for example a corrupt former Deputy Prime Minister deciding to protest against corruption) and demand for the bar girl services drops in half, to only one customer / week.
What’s the girl to do? If she leaves her price the same then she will earn only 2,000 baht / week. Not acceptable.
If she cuts her price to 1,000 baht, then she must now find four customers / week, difficult when her previous average was two and demand has dropped.
Or she could raise her price to 4,000 baht, and make her minimum by attracting that one special customer / week.
Following the example above of luxury goods whose value is difficult to determine, who’s to say that at 4,000 baht she might not attract people who feel that by paying more they would get better service?
(As a relevant aside, a few years ago the Governor of New York, Eliot Spitzer, was forced to resign after it was found that he was frequenting a high price call girl operation. The girls had three price levels: Silver was $3,000 / night, Gold was $4,000 / night and Platinum was $5,000 / night. The Governor always ordered Platinum. What emerged after the scandal broke was that the girls were the same. When a customer ordered, regardless of which level he asked for, he got the next girl on the waiting list. The service reasoned that you get what you pay for, and no one can tell the difference between a $3,000 experience and a $5,000 experience).
So we now see that both in the case of the hotel as well as the bar girl, bringing prices down during periods of slow demand is not always the best way to maximize total revenue.
The problem many writers complaining to this website face is that they confuse their interests with the interests of the service provider. The writer wants a cheaper hotel room and cheaper bar girl payment, and thinks because he is there when others aren’t that he deserves a discount. When he fails to get the desired discount he states that “Thais are stupid” and don’t understand basic economics.
The real conclusion is that he is failing to put himself into the others position and so not understanding that behavior that seems stupid is actually the optimal course of action.
There also seems to be a lot of generalizations going on in these pages, with people writing that all Thai women are conniving cheating money grubbers, all Thai men are drunken lowlifes that live off the earnings of their prostitute wives, and that Thais in general are of low intelligence.
Southeast Asia’s second largest economy, the world’s leading producer of one ton trucks, (Thailand is also in the world’s top ten of automobile exporting countries), and the world’s leading producer of hard disk drives did not get there by being run by fornicating, alcoholic, uneducated gits.
The more one learns about the real Thailand and better understands what real Thais are like, the more enjoyable will be one’s experience in this magnificent country.