The Hospitality Industry and Near Zero Marginal Costs:

A Case Study of Airbnb

Introduction
The hospitality industry has been an important mainstay of global output and employment.
According to the World Travel and Tourism Council (WTTC), the industry contributed 10.4% to
global GDP in 2018, and accounted for one in ten employment opportunities (EHL Insights,
2020). Prior to the pandemic, the amount spent on travel around the world continued to grow
for five years (around 24.75% growth in leisure travel and 19.59% for business travel between
2015-2019). A few of the big players in this industry are Hilton Hotels & Resorts, Marriott
International and InterContinental hotels. The worldwide hospitality market reached $3,486
billion dollars in 2020, and is expected to grow to $4,132 billion dollars in 2021, that is at a
CAGR of 18.5% (Lock, 2021).
For some years now, within the hospitality industry, we have been hearing about the words
“sharing economy” which refers to the transformation of resources underutilized in productive
ones. This phenomenon is also related to the two-sided markets characterized by the presence
of a platform that provides distinct services to two sides of the market and that charges
different prices to them. In the hospitality industry, for example, there are hosts and customers.
From an economic perspective, the sharing economy model effectively removed the middle
men stakeholders (e.g., online booking firms) and allow suppliers to directly connect with
consumers. To this extent, Rifkin is predicting that consumers would gain the most advantage,
since they can become “pro-sumers” and they will be able to produce and share services at very
low costs compared to the traditional hotels and hospitality companies which are organized
around vertical integration (Lyster, 2014). The aim of this work is to analyze the impact of
sharing economy in the hospitality industry, by focusing on the Airbnb case.
Airbnb: a new way of doing business
Airbnb entered the industry in 2008, by creating an online marketplace where travellers can
rent rooms or apartments for short-term periods. Today, Airbnb is one of the biggest
companies in the sector, generating $3.38 billion revenue, with more than 5,600 employees
and an enterprise value of $75 billion as of 2020 (Lock, 2016; Lock, 2021). Furthermore, Airbnb
is available in 34,000 cities, across 190 countries and it has approximately 7 million host listings,
from small room in shared apartments to huge villas (Curry, 2020).
For the Supply and Demand, given that the hosts can choose to rent on any given day, they can
always respond to the demand for accommodation. For example, in cities like New York or
London, demand for accommodation is really high, supply is often limited, resulting in higher
prices. In such cases, Airbnb hosts tend to have more flexibility and lower operating costs than
hotels, and can benefit from the surge in demand (Roach, 2018).

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 Figure-1: Evolution of hotel and Airbnb performance in London (Oskam, 2019)

Changes in value chain and business models

In this section, we analyse the traditional hotel value chain and contrast it to the Airbnb
business model.

Figure-2: Traditional Hotel Value Chain (Studybay, 2018)

In the Airbnb ecosystem, more startups are approaching to assist in different aspects of the
peer-to-peer accommodation industry. The online platform business model is a major source of
value for Airbnb as most aspects of operations are handled by the hosts (Dudovskiy, 2019).

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Unlike linear businesses in the hospitality industry, Airbnb can scale unbelievable quickly and at
little or no marginal cost. It does not need to build a room to add it to their website, while for a
traditional hotel chain there will be a significant cost attached for construction (Rifkin, 2014).
This platform creates value for everyone, like hosts, guests and value through share
orchestration of the network and connections (Michael, 2015). Thus, the graph below is
showing the new value chain for Airbnb.

Figure-3: New Value Chain analysis (Volberda et al., 2019)

 Primary activities: Inbound logistics associate receiving and keeping raw materials that
are used to assemble products. Operations of Airbnb include various activities like
handling keys and purification. Hosts and not the company run the Airbnb platform.
Outbound logistics are disseminating ready goods which deliver to the customers. The
marketing strategy contains principles of outstanding brand partnerships and gains from
social influencers. Airbnb has a significant advantage regarding its services for
customers. Services are available with agents through phone, email, 30 various
languages, and all the time (Dudovskiy, 2019).
 Support activities: The firm infrastructure contains planning, general and quality
management, legal services, and finance. Human resources management is essential for
any achievement for the organization. It includes hiring people, skill assessment,
training, and development. Technological development consists of process engineering,
component, and feature design. Procurement is handling different equipment,
buildings, supplies, and machinery (Pro, n.d.).

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Additionally, the table below shows the main features of the Airbnb’s business model.

Figure-4: Airbnb‘s new value chain (Michael, 2015)

Positive impacts
Airbnb's business had several positive impacts and externalities, creating value for new
stakeholders in the value chain as well as hotels, peers, consumers and the whole community.
The main studies who analyzed these effects were conducted by Farronato and Fradkin (2016)
and by Farronato and Fradkin (2018) and they can be summarized as follows:

 Consumer - People can live as local: Airbnb platform has made possible to rent a room
or an entire apartment in a short term (e.g., 2-3 days or an entire month). In this way,
the consumer renters have the possibility to experience the real life of being and living
in a different city like a local.
 Host - Business opened to everyone: Airbnb allows any people who have a space
underused household to rent it. The typical host has an alternative primary job, he is
not trained in hospitality and he does not have the benefit of economies of scale unlike
the hotels. The hosting costs for a given night depend on availability of the rooms, on
the time it takes to prepare a room for a guest, on the cost opportunity of a host's time
and the perceived risk of hosting.

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  Market - Stronger elasticity of demand: the factors that influence the size and use of
Airbnb are the average price per room in a market, the constraints of hotel capacity, the
marginal costs of peers, the fluctuations in demand. Also, the system of Airbnb's
reputation, whose purpose is to increase user trust, affects the use of the platform.
 Competitors - Higher competition within the industry: Airbnb has reduced hotels’
revenues, their occupancy rates, their prices and the possibility for them to implement
marketing strategies. For instance, hotels in captive markets have a better chance of
adjusting their price above their marginal costs, with respect to those hotels operating
in non-captive markets with constraints.
 Community - Greater sector surplus: the two studies mentioned above analyzed what is
the impact of Airbnb on the sector surplus and both studios empirically demonstrated
that the consumer and sector surplus increase over time.
Negative impacts
In this section, we examine the negative impacts Airbnb’s near zero marginal cost disruption
model has. In the classical hotel management ecosystem, there are many stakeholders that will
have no place in the near future, once the zero marginal cost model of Airbnb becomes the
industry standard.
The customer journey for a holiday or business trip typically began from the travel agencies,
either online or traditional, who provided hotel options and advisory, assisted with completing
bookings and earned a commission. The journey proceeded to the hotel, which may have been
a franchise to a bigger hotel brand. The customer got serviced with hotel catering, beverages,
cleaning, laundry, toiletries among other services. The services were most possibly
accompanied with several porters, guest services staff, chefs, maintenance staff and so on. We
can observe the existence of a chain where value is distributed among several stakeholders.
Output for some of them represents inputs for others. On an aggregate level, the extended
input-output relationship of sectors and participants incorporate the gross domestic product
(GDP).
In the near zero marginal model, we can see an imminent risk to these stakeholders in the new
value chain. Customers go directly to the Airbnb’s website or app to book their stays and
communicate with their hosts, eliminating the chain of middlemen, added services and large
buildings. We can rationalize that there will be unemployment of workers in this sector, who
are unable to transfer their skills or learn another skill fast. We can also deduce further
reduction in hospitality related construction as there will be less demand for franchises and
hotel buildings. There will be a lot more efficiency in the market, but we will move from value
distribution to value capture and concentration. The disruption also affects less obvious
stakeholders such as interior design services and security companies, who provide functional
hotel design and private security to hotels respectively. Majority of the created value will be

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shared by the Airbnb platform and the hosts, unlike the previous model which had many
participants in the input and output economy.
Extrapolating down the line, we can posit that the distribution of less value will lead to an
overall decrease in the aggregate demand and supply of the hospitality industry. There is also
the propensity for income inequality due to the fewer number of stakeholders in the value
chain.

Knock On
Unemployment of specialized Effects
Construction companies Decreased contribution to
workers Hotel services supply chain GDP
Travel agencies out of the Security services Income inequality
value chain. Interior Design Services Value concentration
Hotel franchises no longer Furniture companies
required.

Imminent Long Term

Risks Overview

Figure 5: Negative Impacts of the Airbnb business model to the hospitality industry.

Conclusion
Summarily, the transition from a value distribution model to value concentration model in the
hospitality sector will improve efficiency and pricing in the industry. There will also be a shift in the value
chain from hotel franchises and services to software developers, rental property owners, and big data as
a result of the amount of information and segmentation that is made possible through the platform.
Furthermore, the new value chain will generate positive and negative externalities on aggregate output,
inequality and redundancy.

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