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

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. (JEL D24, L83, L93)