Being better vs. being different: Differentiation, competition, and pricing strategies in the Spanish hotel industry

We study the effects of vertical and horizontal differentiation on pricing policy in a large sample of hotels in Spain. We show that hotels with more stars (i.e., vertically differentiated) offer smaller discounts over listed prices, in addition to charging higher prices. Similarly, hotels that belong to a branded chain (i.e., horizontal differentiation) also charge higher prices and provide smaller discounts. We show how the degree of local competition moderates the effect of differentiation on pricing policy, but only for vertical differentiation. Differentiation indeed protects hotels from the pressure to reduce prices as competition increases, but being better seems to be more effective than just being different.