Competitive price interactions and strategic responses in the lodging market

It is generally expected that competitors do not react uniformly in response to a cut in price. Although the literature suggests that firms are heterogeneous in their price responses, little empirical research has examined how competitors actually respond. This study investigates how hotels strategically respond to competitors' room rate decisions through the lens of the firm dyad. Through an empirical analysis using a fixed effect spatial panel, we find 1) that smaller hotels reduce their room rates following price cuts of larger hotels, while the larger hotels are unaffected by discounts of smaller hotels, 2) that chain and independent hotels are interdependent in their price decisions, and 3) that older hotels discount room rates when their newer competitors cut prices while price cuts by older hotels are not associated with price-cutting by newer properties. Implications for practitioners and suggestions for future research are discussed along with findings of the study.