Cost and profit efficiency: the case of Bulgarian hotel industry

Abstract

The current paper aims to analyse and estimate the Bulgarian hotel industry's efficiency, focusing on both cost and profit efficiency. We attempt to examine whether service quality, as well as tourism specialization, affect hotel industry efficiency. By using the Battese and Coelli (1995) model this study applies a Stochastic frontier analysis with 309 Bulgarian hotels analysed for the period of 10 years (2008-2017). The methodology allows to be estimated the efficiency level and influencing factors, as well as decompose the error into both, random and inefficiency error. The results show that the cost efficiency decreases when the hotel category increases and significantly fluctuates over time in a decreasing tendency. On the other hand, quality service and tourism specialization cannot unambitiously explain the profit inefficiency of Bulgarian hotels. Thus, the hotel management needs to apply strategies related to differentiating hotel products and/or better pricing, rather than tourism development of the destination.