Premium or Discount in Hotel Room Rates? The Dual Effects of a Central Downtown Location

Abstract

The hotel industry generally recognizes the advantages of a central business district location, resulting in higher demand, pricing ability, and profitability. What research has not done is to consider the negative effects of agglomeration and competition among centrally located hotels. Reasoning that hotels engage in price competition through revenue management, the authors developed a theoretical framework of bounded price competition. The authors theorize that rate-based competition would intensify among contiguous hotels, but they also propose that such rate-based competition is contingent on demand levels. When demand is strong, one would not expect rate-based competition. A test of this hypothesis using data from the downtown Chicago hotel market supported that a central location has a dual effect on hotel room rates. Hotels see higher premiums in the peak season, due to strong demand, and steeper discounts in shoulder seasons, as a result of competition with nearby hotels. The findings also suggest that existing models, which do not consider hotel spacing, may have overestimated the central location premium.