Multimarket contact, differentiation, and prices of chain hotels

This study seeks to analyze the joint effect of multimarket contact and product differentiation on the intensity of price competition between chain hotels. The theory predicts that both variables reduce price rivalry, but little is known about their interaction effect. Multimarket literature establishes that when two firms meet one another in more than one market, the mutual recognition of their interdependencies will reduce the intensity of competition, leading to mutual forbearance. This article argues that differentiation moderates negatively the effect of multimarket contact on price because differentiation decreases the recognition of interdependence and thus, it makes difficult mutual forbearance. Using data from 1147 Spanish hotels that belong to a chain, this study shows that chain hotels with higher multimarket contact and higher differentiation (i.e. more stars, the Q certificate, common umbrella brand and a unique combination of services) charge higher prices. The evidence confirms the negative interaction but only for horizontal differentiation (i.e. different services and common brand).