Discounting Works in the Hotel Industry: A Structural Approach to Understanding Why

Robertico Croes and Kelly J. Semrad
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Robertico Croes: Rosen College of Hospitality Management, University of Central Florida, 9907 Universal Blvd, Orlando, FL 32819-9357, USA
Kelly J. Semrad: Eric Friedheim Tourism Institute, University of Florida, PO Box 118208, FLG #242D, Gainesville, FL 32611, USA

Tourism Economics, 2012, vol. 18, issue 4, 769-779

Abstract: This case study provides an empirical assessment of the relationship between discounting hotel room rates and hotel financial performance. The dynamics of the lodging industry are accounted for through the adoption of an error correction model. Recent research suggests that the use of discounting room rates may not be an effective pricing strategy as it results in increased occupancy rates at decreased average daily rates, thereby reducing a common financial performance indicator – revenue per available room (revPAR). The recommendation made to hotel managers, then, is to avoid discounting and instead adopt an average rate. This study generates opposing findings and reveals that discounting may be a practical short-term pricing solution that may compensate for market disequilibria. The results suggest that using statistical residuals rather than room rate averages may more accurately forecast appropriate hotel room rates and balance supply and demand. Thus, the recommendation of adopting average room rates may provide incorrect implications for managers in the short run.

Keywords: hotels; discounting; room rates; residuals; error correction model (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:sae:toueco:v:18:y:2012:i:4:p:769-779

DOI: 10.5367/te.2012.0138

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