The article proposes a discrete choice framework for looking at the intraurban market for hotel services. Like most real estate products, hotel services are highly differentiated. Thus, every hotel operator faces a downward-sloping demand function and, in line with microeconomic tradition is assumed to select a profit-maximizing room price. Optimal price determines quantity of services and thus also fixes the optimal occupancy. The demand for a given hotel's services is a product of the urban area's total hotel market size and the hotel's discrete-choice market-share function. Profit maximization cannot be computed in closed form; therefore, it is simulated. Simulations yield optimal room price as well as occupancy, for high-, medium-, and low-quality hotels, while keeping size constant. As expected, simulation results show that high-quality hotels are constrained by size, especially when the market is up. Those of low quality are constrained by insufficient demand, especially when the market is down.
The Journal of Real Estate Finance and Economics – Springer Journals
Published: Oct 6, 2004
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