Journal of Real Estate Finance and Economics, 17:2, 199±211 (1998)
# 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Toward a Theory of the Intraurban Market for
Faculty of Architecture and Town Planning, and Center for City and Regional Studies, Technion,
Israel Institute of Technology
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 pro®t-maximizing room
price. Optimal price determines quantity of services and thus also ®xes 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. Pro®t 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 insuf®cient demand, especially when
the market is down.
Key Words: hotel hedonics, discrete choice, market share
The purpose of this article is to propose a theory of hotel market behavior focusing on
market share of competing facilities within the same city. In other words, the aim is to
intelligently answer these questions: Within an urban area, which hotels will be expensive
or cheap, which ones will be empty or full, and what data is necessary for producing such
Of the various real estate market categories, housing has received the most attention,
commercial property ranks second, and hotels are last and far behind. A RealSource
(IURE) literature search has yielded eighty-seven papers. While some of these papers
discuss valuation techniques and others offer market monitoring data or advice on how to
obtain such, many are motivated as a response to the late 1980s and early 1990s real estate
Several of the crisis-related papers discuss restructuring (Bergsman, 1990; Davis, 1991;
Gibbs, 1993) and rehabilitation (``Renovating,'' 1990; ``Reversing,'' 1992; Berg, 1991).
These issues will be addressed further below in the article, where their relevance to
demand for hotel services will be examined.
Two of the papers (Png, 1988; Scott et al., 1995) share a common theme with this one: