International Journal of Hospitality Management 33 (2013) 490–493 Contents lists available at SciVerse ScienceDirect International Journal of Hospitality Management journal homepage: www.elsevier.com/locate/ijhosman Research note How do advertising expenditures influence hotels’ performance? Chiang-Ming Chen a,∗ , Yu-Chen Lin b a Department of Economics, National Chi Nan University, 1 University Road, Puli, Nantou 54561, Taiwan b Department of Economics, Soochow University, Taipei, Taiwan article info Keywords: Advertising International tourist hotel Room price Room occupancy abstract Existing studies have shown a positive relationship between advertising and hotel room revenue. How- ever, it is not clear through which channel advertising affects hotel revenue. We contribute to the literature by showing that advertising has a significant positive impact on hotel room price, but not on room occupancy. Thus, advertising affects room revenues through room price, not quantity demanded. © 2012 Elsevier Ltd. All rights reserved. 1. Introduction For hoteliers, advertising is one of the most important marketing tools used to attract customers (Hilmi and Ngo, 2011). Advertis- ing investments help to create intangible value to firms (Hsu and Jang, 2008). Moreover, it affects hotels’ performance. For exam- ple, O’Neill et al. (2008) point out that advertising can enhance brand name and hotel recognition. They use US data and find a positive effect of marketing expenses on room revenue for nearly all categories of hotels except for economy properties. Although O’Neill et al. (2008) have demonstrated the positive association between marketing expenditures and hotels’ room revenue, it is not clear through which channel advertising affects hotels’ perfor- mance. Since a hotel’s room revenue is made up of its price (average daily room rate) and hotel occupancy (quantity demanded), adver- tising may affect a hotel’s room revenue via these two channels. The purpose of this paper is to investigate which channel, price or occupancy, plays a bigger role in the relationship between advertis- ing and hotels’ room revenue using Taiwanese international tourist hotel (ITH) data. Literature on the relationship between advertising and sales (consumer demand) and between advertising and price is abun- dant. One stream of marketing research claims that advertising increases the number of customers due to the “persuasive” and “informative” influences of advertising. In other words, advertis- ing can enhance consumer demand by changing consumer tastes (Kaldor, 1950; Stigler and Becker, 1977; Mittal and Baker, 2002) or by providing consumers with product information (Telser, 1964; Nelson, 1970, 1974; Demzetz, 1979). Another stream of research concerns the link between advertis- ing and price. An older view of this issue is that prices are higher for ∗ Corresponding author. Tel.: +886 49 2910960x4629; fax: +886 49 2914435. E-mail addresses: ming@ncnu.edu.tw (C.-M. Chen), liny@scu.edu.tw (Y.-C. Lin). products that are more heavily advertised as the costs of promotion are reflected in the prices charged by the firms and as advertising may serve as an entry barrier which leads to a more concentrated market (Orenstein, 1976). Erickson and Jacobson (1992) emphasize the positive effect of advertising on price. They claim that adver- tising is used to enhance brand name recognition and to create a price premium. However, the opposite relationship is also docu- mented by some empirical research. Benham (1972) investigates the effect of advertising on the price of eyeglasses and argues that two opposing forces affect the price level. On the one hand, adver- tising enhances product differentiation, which leads to a higher price. On the other hand, advertising reduces consumers’ search costs as it provides consumers with more product information, which leads to a lower price level. Benham (1972) finds that prices of advertised items are lower than non-advertised items. Steiner (1973) conducts a similar test and finds a sharp decline in prices of toys following the introduction of advertising. Overall, empirical evidence gives ambiguous results for the effect of advertising on price. 1 Most empirical research on the price and quantity implica- tions of advertising focuses on the manufactured good. However, insufficient attention is given to the service sector, especially the hotel service sector. Since the impacts of advertising may differ across industries (Rizzo and Zeckhauser, 1992), we contribute to the literature by showing that advertising affects room revenue through its influence on price, but not room occupancy for the Taiwanese hospitality industry. Our empirical evidence provides useful insights for hotel managers when maximizing the hotel room revenue. 1 Bagwell (2005) provides a detailed summary of empirical evidence on the rela- tionship between advertising and sales and between advertising and price in the economic literature. 0278-4319/$ – see front matter © 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.ijhm.2012.08.007