Sri Lanka says Colombo hotel price floor suspended to promote off-season

ECONOMYNEXT – Sri Lanka has ‘temporarily’ lifted minimum prices on Colombo hotel rooms to boost off-season arrivals for two months, Tourism Minister John Amaratunga said amid questions over whether the controversial price floors were legally enforceable.

Sri Lanka is offering a Colombo City 3-night package for 99 dollars a per person in 3-star hotels, while under price controls a double room has to be sold at 75 dollars per night from September to November.

The price controls had helped 3-star hotels sell a room at the rates comparable to superior 4 and 5 star hotels in some East Asian capitals.

The price floors undermined a free market preventing hotels from cutting rates during the off-season, or dynamically pricing during the when they had excess rooms, like their East Asian counterparts have been doing for years.

First year economics students learn that a price ceiling imposed with the help of the coercive power of the state creates shortages and black-markets by boosting the quantity demanded, while a price floor generates a surplus, by reducing the quantity demanded.

However after people grow up they appear to forget.

Booking engines make prices transparent and allow dynamic pricing. Colombo hotels are not just competing against each other, but against rival destinations with more activity.

High floor prices in Colombo however may have helped emerging hotspots outside Colombo by driving tourists away faster from the capital, where there was not much to ‘do’ anyway.

Under the off-season promotion packages are selling hotel rooms at prices lower than the minimum rate. In the winter season, when arrivals increase, room rates go up, not only in Colombo but in other markets as well.

A gazette notice prescribing minimum rates had lapsed in March 2018 but Minister Amaratunga said he was using ministerial powers to enforce the price floors.

Amaratunga said that he had written a letter to the tourism promotion office, saying that the minimum room rate were in place.

He was questioned on how the government was violating its own price floor by selling at low prices in a package to promote the off-season.

“For these couple of months we have removed it,” he replied.

Amaratunga said he can re-issue minimum rate gazette into force whenever required.

Sri Lanka Conventions Bureau Chairman Kumar de Silva said Amaratunga has granted an exemption for the off-season promotions campaign.

De Silva said the off-season packages attempt to remove the perception that Colombo is an expensive city to visit.

Amaratunga had earlier said an audit report revealed all hotels, including those who want minimum rates to remain, have violated the price floors.

After the gazette lapsed, some hotels have been selling below floor prices, when they had excess capacity.

Amaratinga said he would not penalize past violations according to rule, but going forward, all violations will be penalized by the fine set in the gazette, as well as a cancellation of liquor licenses. (Colombo/Sept11/2018)