Maximum or Minimum? Strategic Patterns of the Lodging Industry
Abstract
Two-dimensional Hotelling models predict that firms choose to maximally differentiate on one dominant characteristic and minimally differentiate on the other dominated characteristic. When consumers have more choices, firms tend to improve all dimensions. This study uses lodging tax data from the Texas Comptroller of Public Accounts to examine the joint choices of geographic location and product positioning (or brand) by multi-unit hotel operators at different market boundary levels. First, our findings suggest that greater distance between own hotels is associated with less product differentiation, which implies a max-min equilibrium. Second, considering the coexistence of horizontal and vertical differentiation, we obtain a higher likelihood a hotel will be of the same quality tier as its nearest neighbor the nearer the neighbor; while a farther distance to nearest neighbor increases the degree of quality differentiation in the scenario of vertical differentiation. This implies both min-max and max-max equilibria are obtained. Third, owners with properties at different levels of quality are more likely to add new properties that are higher quality, while more geographically differentiated portfolios add lower quality properties at the margin. We obtain a max-min equilibrium. Therefore, our findings provide insights into the strategic motivations of multi-unit owners and, within their decisions, the relevant dominance of place versus market position.