Competitive Dynamics and Pricing Behavior in US Hotels: The Role of Co-location

Which hotels benefit from locating next to competitors? In this study of 14,995 hotels we provide evidence of both a price benefit and a detriment for specific hotels that co-locate next to other hotels. Relying on the theoretical framework of agglomeration economics, the results reveal that hotels that co-locate in the same geographic cluster with the highest quality segmented firms (luxury hotels) accrue a price premium compared to competitors in markets with larger proportions of lower-segmented competitors. The strongest price premiums were obtained by midscale hotels without food and beverage in clusters with large proportions of luxury and upscale hotels. Similarly, high-end hotels that pursue differentiation strategies experience price erosion when they are in the same geographic location as lower-end hotels. Luxury hotels experienced the greatest price erosion when they operate in locations with large proportions of economy and midscale hotels. The paper concludes with a discussion of the implications of these findings for competitive dynamics and hotel location decisions.