Quality differentiation and conditional spatial price competition among hotels

Abstract

It is generally accepted that location is the dominant product attribute for hotels. Accordingly, studies on price competition have often utilized fixed geographic boundaries when defining competitive sets. When travelers are willing to substitute location and quality, however, the spatial extent of competition can depend on the hotels' quality. Therefore, it can be hypothesized that geographic boundary of price competition among hotels is conditional on quality differentiation. Through an empirical analysis based on two-stage least squares modified to test for spatial price competition, the present study finds that hotels compete with more distant neighbors of similar quality than those who are quality-differentiated. In addition, the results also suggest possibility of cooperation among neighboring hotels similar in quality. Implications and suggestions are presented along with the findings of the study, which is expected to contribute to the literature by suggesting a new perspective on the relationship between quality differentiation and price competition among hotels.