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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Robertico Croes & Kelly J. Semrad, 2012. "Discounting Works in the Hotel Industry: A Structural Approach to Understanding Why," Tourism Economics, , vol. 18(4), pages 769-779, August.
    • Handle: RePEc:sae:toueco:v:18:y:2012:i:4:p:769-779
    DOI: 10.5367/te.2012.0138
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    References listed on IDEAS

    as
    1. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107.
    2. D. Jeffrey & R.R.D. Barden & P.J. Buckley & N.J. Hubbard, 2002. "What Makes for a Successful Hotel? Insights on Hotel Management Following 15 Years of Hotel Occupancy Analysis in England," The Service Industries Journal, Taylor & Francis Journals, vol. 22(2), pages 73-88.
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