The exploration of hotel reference prices under dynamic pricing scenarios and different forms of competition

Abstract

The reference price, used by consumers to evaluate market prices, has tremendous relevance in dynamic pricing. Reconciling current heterogeneous theories and studies on reference prices, this paper analyzes the impact of hotel price sequences on consumers' reference prices through a lab and a field experiment. Experiment 1 tests the importance of retrospective price evaluations, while Experiment 2 evaluates the impact of three forms of competition: (i) simultaneous behavior, where firms adjust prices simultaneously; (ii) leader-follower behavior, where one firm acts as the leader; and (iii) independent behavior, where each player takes its rival's strategy as given and seeks to maximize its own profits. The results show that consumers decrease their reference price when competing hotels adjust their prices simultaneously. Relevant managerial implications are drawn for the hospitality industry, which is affected by the presence of online travel agencies that announce the daily rates offered by each competitor. Keywords IntroductionSuppose that Carol wants to book a hotel room and begins checking prices (hotel rates) over the Internet. After several searches, she realizes that there is a certain degree of price variability each time she checks. To judge the prices she is offered, she can recall the prices she may have seen in the past, the prices paid for rooms at the same hotel, and/or the prices charged by similar competing hotels. What she has seen or paid in the past, along with the prices of comparable hotels, will influence her price evaluation.The issue of customers' price evaluations-how customers perceive prices and their variations-has become an important topic in hospitality management, particularly due to the widespread adoption of revenue management techniques by the lodging and travel industry.Dynamic pricing practices are now common and have become more feasible as Internet purchasing behavior has increased (Abrate et al., 2012). The widespread use of dynamic pricing is partly attributable to online tools, by which hotels can easily adjust prices in real time depending on the number of available rooms, the inventory and prices of close competitors, and other contextual indicators. However, though these pricing practices may benefit both sellers and buyers, consumers may perceive dynamic pricing as unfair because it produces a variety of rates for what appear to be identical products, such as the same hotel room (Choi and Mattila, 2005).The reference price is the standard against which consumers evaluate current product prices to assess their attractiveness (Monroe, 1973). Reference price has been the subject of a large body of research by both economists and marketing scholars. It can be conceptualized as a price expectation based on customers' memories of previous information (Mazumdar et al., 2005) or 2 as the normative price-the price considered a "fair" charge for the product (Bolton et al., 2003;Campbell, 1999).Several studies have underlined the importance of including customers' refe...

The More the Merrier? Understanding How Travel Frequency Shapes Willingness to Pay

“…Past experiences with the service determine customers' prior knowledge, thereby creating customer heterogeneity (Moon et al, 2006). Previous studies in hospitality research emphasize the role of reference price in shaping customer reactions to prices (e.g., Choi et al, 2017;Choi & Mattila, 2017;Viglia et al, 2016). However, previous research has paid scant attention to the influence of travel frequency on customer's internal norms and reactions to newly encountered prices (Karande & Magnini, 2011).…”

“…Drawing on the behavioral price literature, this study investigates the effect of travel frequency on leisure travelers' WTP. While previous literature has investigated the role of reference prices in customer evaluation of hotel prices (e.g., Choi & Mattila, 2017;Viglia, Mauri, & Carricano, 2016), past research has fallen short of analyzing how different customer characteristics affect the formation of reference prices and WTP (Choi, Joe, & Mattila, 2017;Denizci Guillet & Mohammed, 2015).…”

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“…Usually, reference price for a demand category is the price of the last sale in this category. However, it can also account for earlier prices of the same hotel and hotels-competitors, see Viglia et al [115] for a discussion of the reference price concept. We assume that the pairs of adjacent room types are (1,2) and (2,3), that is, rooms of types 1 and 3 are adjacent to a room of type 2.…”

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“…Factors such as the demand for quality and differentiation of services by customers, changes in buying behaviour and how customers perceive the change in prices, the rise of accommodation booking websites and online travel agencies, market uncertainty, and dynamic pricing have become a challenge for the managers of these organizations (Rana & Oliveira, 2014;Viglia, Mauri, & Carricano, 2016). In addition, the ability to acquire internal and external knowledge and to develop more flexible enterprise systems have become essential to effectively meet the expectations of stakeholders and environmental changes (Fraj, Matute & Melero, 2015).…”