Competitive Dynamics and Pricing Behavior in US Hotels: The Role of Co‐location

Abstract

Which hotels benefit from locating next to competitors? In this study of 14,995 hotels we provide evidence of both a price benefit and a detriment for specific hotels that co‐locate next to other hotels. Relying on the theoretical framework of agglomeration economics, the results reveal that hotels that co‐locate in the same geographic cluster with the highest quality segmented firms (luxury hotels) accrue a price premium compared to competitors in markets with larger proportions of lower‐segmented competitors. The strongest price premiums were obtained by midscale hotels without food and beverage in clusters with large proportions of luxury and upscale hotels. Similarly, high‐end hotels that pursue differentiation strategies experience price erosion when they are in the same geographic location as lower‐end hotels. Luxury hotels experienced the greatest price erosion when they operate in locations with large proportions of economy and midscale hotels. The paper concludes with a discussion of the implications of these findings for competitive dynamics and hotel location decisions.

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