An Exploration of Luxury Hotels in Tanzania

by Diego A. Comin

Executive Summary — Tanzania is justly famous for its incredible natural landmarks such as the Rift Valley, Ngorongoro Crater, Lake Manyara, Mount Kilimanjaro, Zanzibar, and, above all, the Serengeti and the Great Migration. Why, despite being so richly endowed in touristic resources, does Tanzania receive relatively few tourists and little revenue from tourism? Diego Comin explored the drivers and influencing factors on the size of the tourism sector, using as a starting point the abnormally high prices of upscale hotels in Tanzania, especially in the safari areas. Findings suggest that the cost of supplying upscale hotel services is not sufficient to explain the abnormally high prices, and the more likely candidate is high markups. Interviews with hotel managers supported this conclusion. In addition, while cross-country differences in demand are large, once we control for these differences, discrepancies in upscale hotel prices account for a significant share of cross-country differences in demand, and cross-country differences in demand are very persistent. On the basis of the role of word-of-mouth, learning by doing, and pecuniary externalities in driving differences in demand, there may be room for the Tanzanian government to induce lower hotel prices and to try to independently increase the foreign perception of the country's attractiveness. Key concepts include:

• Despite its world-famous natural resources, Tanzania receives surprisingly few tourists and little revenue from tourism. In 2008, for example, revenues from tourism in that year brought US$17 per inhabitant, the 22nd lowest out of 137 countries surveyed.
• Hotels in the safari area in Tanzania are expensive, and this difference in price cannot be accounted by differences in supply constraints: It must be largely due to differences in markups.
• Once we take into account cross‐country differences in demand, upscale hotel prices account for a significant fraction of cross‐country differences in tourism.

 

Author Abstract

Tourism is a tradeable service activity that could allow some African countries to generate significant growth. Tanzania, given its unique natural assets, is an ideal candidate. However, despite being so richly endowed in touristic resources, Tanzania receives very few tourists and revenues from tourism. To explore the determinants of this performance, I conduct an international survey for upscale hotel managers to measure supply-side constraints on the operation of hotels. The survey reveals that hotels in the safari area in Tanzania are more expensive than comparable hotels, and that this difference in price cannot be accounted for by differences in supply constraints. Further, using cross-country panel data, I show that upscale hotel prices account for a significant fraction of cross-country differences in tourists.



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