COMPETITIVE DYNAMICS AND STRATEGIC PRICING DECISIONS: OBSERVATIONS FROM THE LODGING INDUSTRY

Open Access
Author:
Kim, YongHee
Graduate Program:
Human Development and Family Studies
Degree:
Doctor of Philosophy
Document Type:
Dissertation
Date of Defense:
August 19, 2010
Committee Members:
  • John O'neill, Dissertation Advisor
  • Anna S Mattila, Committee Member
  • Amit Sharma, Committee Member
  • Donald C Hambrick, Committee Member
  • John W. O'neill, Committee Chair
Keywords:
  • pricing
  • strategy
  • competitive dynamics
  • hotel
  • interaction
  • strategic decision
Abstract:
The fundamental question posited by this study was “how do competitors’ pricing changes affect organizations’ strategic pricing behavior?” In answering this question, this study focused on local hotel managers’ competitive pricing decisions. The effectiveness of organization’s strategies and marketing often depends on how the organization responds to its competitors’ strategic movements (e.g., Day & Reibstein, 1997; Reibstein & Wittink, 2005). Therefore, it is critical for an organization to take competitors into account in developing strategic plans. The hospitality pricing literature has been largely focused on customer-based pricing, where room price was based on customer segmentation strategy (i.e., yield management). Hotel pricing research, however, has not paid close attention to the direct effects of competitors’ pricing on hotel manager’s pricing decisions. This study fills the gap in the hospitality pricing literature by diagnosing the influence of competitors on hotels’ strategic pricing behavior. Many studies regarding the competitive interactions among firms in price and advertising have been done at the corporate (or brand) level. In spite of the increasing competition and the importance of competitor effects on strategies and performance of local hotels, empirical research regarding the issue is limited. This study fills this gap in the literature by providing insights into the effects of competitive interactions on hotels’ strategic pricing behavior at the local property level. This study found that competitors’ price changes had a significant influence on hotel managers’ strategic pricing decisions. Specifically, hotel’s room rates were more likely to be influenced by rate changes of competing hotels that were similar in market segment, had a strong market position and a credible commitment to the changes. Local hotel managers were likely to match rate decreases of their rivals that were similar in market segment and had a strong market position. In the case of the rivals’ rate increases, the managers tended to follow the increases when the rate increasing rivals were similar in market segment and had a stronger market position and a credible commitment to the increases. Hotel managers’ outdoing their rivals’ rate changes (either increases or decreases) were unlikely. The managers surpassed their rivals’ rate changes only when certain conditions were met. A greater similarity in market segment between focal and rival hotels, strong brand power of rivals, and higher market demand were the conditions for outdoing rivals’ rate increases, while a greater similarity in market segment, strong brand power of rivals, and their own hotels’ cost leadership strategy were for conditions outdoing rivals’ rate decreases. This study offers substantial contributions to the hospitality strategy and pricing literature and the competitive dynamics literature by examining the influences of specific characteristics of competitors on strategic pricing decisions of an organization (i.e., a local hotel). The findings of this study should assist hotel managers in developing more effective pricing strategies. This study also provided several recommendations for future studies regarding competitive pricing strategies in the lodging industry.