1、Mergers among firms that manage revenue: The curious case of hotels,Luke Froeb Vanderbilt University May 17, 2008 (10:20am)“New Perspectives on Competition Policy“ Truland, IIOC, Arlington, VA,“an economist is somebody who sees something happen in practice and wonders if it will work in theory.“,2,J
2、oint work,Arturs Kalnins School of Hotel Administration, Cornell UniversitySteven Tschantz Mathematics, Vanderbilt University,3,Summary of Findings,Empirical Finding: Hotel in-market mergers Relative to in-market non-merging; increase capacity utilization 3%; reduce price 1% Relative out-of-market m
3、erging increase capacity utilization 3%; same price Theoretical Mechanisms: Post-merger information sharing Post-merger referrals to sister hotels Post-merger loyalty to merged hotels Antitrust Policy: short run gain from merger, “call-arounds”,4,Talk Outline,Empirical Finding Revenue management heu
4、ristics Can we find a theory to explain the finding? Post-merger information sharing Post-merger referrals to sister hotels Post-merger loyalty to merged hotel Antitrust Policy Mergers “Call arounds”,5,Data,Texas Comptroller of Public Accounts. Owner, address, rooms, quarterly revenue. entry and exi
5、t dates ownership transfer Smith Travel Research (proprietary) 1999Q2 -2005Q3, self-reported Larger, brand-affiliated (82%) hotels average price per room-night (Price) room-nights sold (Quantity),6,“10th Closest” Local Merger Area,Unit changes to “green” ownership; increases HHI of local area,“Green
6、” owners other unit,10th closest unit,Descriptive Statistics,8,Fixed-Effects Regressions,Data 196 Texas hotel mergers (889 hotels) from 1999-2005 Which increase local HHI Effects Hotel dummies Year X Type dummies Type s: urban, suburban, small town, highway, airport and resort AR(1) Owner characteri
7、stics First year of new owner Experience of owner Number of other hotels,9,Regression: Mergers Increase Q,10,Regression: Mergers reduce Price,11,12,Talk Outline,Empirical Finding Revenue Management Heuristics Which theory can explain the finding? Post-merger information sharing Post-merger referrals
8、 to sister hotels Post-merger loyalty to merged hotel Antitrust Policy Mergers “Call arounds”,13,Canonical Rev. Management Problem,Firms set price before demand realized Fixed capacity, (big fixed or sunk costs, small marginal costs) Q=Mindemand(price), Capacity Price to fill ship, hotel, parking lo
9、t Maxrevenue Maxprofit,14,Rev. Mgt. pricing models: minimize expected pricing errors,Cost of over-pricing is unused capacity Q(P-MC) Could have sold more Cost of under-pricing is excess demand P(Q) Could have charged more Optimal P minimizes Eerror costs Probover-pricing*Costover-pricing + Probunder
10、-pricing*Costunder-pricing,15,Typical Profit Curve with a Rounded Peak,16,Non-binding capacity constraint: Under-pricing errors more costly,17,Expected profit curve: avoid under-pricing,18,Binding capacity constraint: Over-pricing errors more costly,19,Expected profit curve: avoid over-pricing,20,Va
11、nderbilt University,21,It takes a lot of uncertainty to make a noticeable difference,Early merger model: CompetitionMonopoly,Merger monopoly - competition No effect if capacity constrained Dowell (1984),22,Game-theory merger models: Parking lots,J. Emetrics (2003) Constraints on merging lots attenua
12、te price effects by more than constraints on non-merging lots amplify them Accounts only for “original” not “reflected” demand Certainty equivalence,23,Rev. Mgt. Merger Heuristics,Unilateral effect for unconstrained hotel: Increases under-pricing error costs because a decrease in price steals share
13、from sister hotels Info sharing: fewer pricing errors Fewer over-pricing errors higher utilization Referrals: reduce under-pricing error costs Hotel can refer over-booked customers to sister hotel Loyalty: reduces under-pricing error cost Increases future demand for hotel “network.” Role of merger?,
14、24,25,Talk Outline,Empirical Finding Revenue Management Heuristics Which theory can explain the finding? Post-merger information sharing Post-merger referrals to sister hotels Post-merger loyalty to merged hotel Antitrust Policy Mergers “Call arounds”,26,Post-merger information sharing,Our hotel par
15、ticipates in call-arounds regularly, daily at 8am, 6pm, and 11pm. We will ask for all proximate properties availability, rate, number of arrivals, and how many rooms are left to sell. Hotels that are not among the Midway Hotel Center i.e., not operated by the same management company participate as w
16、ell, but front desk attendants will give false information because they are too lazy or dont care enough to give accurate numbers. Hampton Inn, Chicago Midway Airport.,27,Post-merger info-sharing,Analogous to the difference between expected profit maximization (uncertainty); and deterministic profit
17、 maximization (no uncertainty) Fewer over-pricing errors higher utilization Price can be higher or lower. Can we illustrate this effect in a game theoretic context? if we ignore over-booked customers,28,29,Game theoretic model: Poisson arrivals on top of logit choice model,Poisson arrival process wi
18、th mean On top of n-choice logit demand model Implies n independent arrival processes with means (si),Vanderbilt University,30,Sampling Uncertainty vs. Parameter Uncertainty,Gamma(, ) prior on unknown mean arrivals Conjugate to Poisson Each firmi observes fraction i (common knowledge), and gets a pr
19、ivate signal i successes. Firms posterior information characterized by Gamma(+i, +i) on unknown ,31,Nash Equilibrium,Optimal price maximizes expected profit as a function of own signal, pi(i)Expectation over all possible signals and all possible quantities,32,Talk Outline,Empirical Finding Revenue M
20、anagement Heuristics Which Theory can explain finding? Post-merger information sharing Post-merger referrals to sister hotels Post-merger loyalty to merged hotel Antitrust Policy Mergers “Call arounds”,33,Post-merger referrals to sister hotels,We do refer, and referrals account for a substantial par
21、t of our sales. We first refer to the properties owned by our same owner. These are our sister hotels. But if our sister hotels are full, we will refer to other non-affiliated hotels. We get very few referrals from hotels that are not our sister hotels because most of our competitive set are chains
22、that have sister hotels of their own that they refer to. We do get other referrals occasionally and these are the people the other hotels we refer to when sisters are at full occupancy. General Manager, Hotel Lombardy, Washington, DC,34,Post-merger referrals to sister hotels (cont.),In 2000, Hilton
23、bought Promus Hotels (4 brands and 1,700 hotels) “After the acquisition, when there wasnt a room available in the Hilton we would cross-sell them to the Embassy Suite or Double Tree Hotel in Times Square. And at last count, starting in 2000, we run on an annual basis about US $400 million in cross-s
24、ell revenue.”,35,Referral Demand Model,First choice (“original”) demand for 1Overflow demand from 12Total demand for 1: Integration over four states : both, neither, one Referrals matter if one of hotels is constrained.,36,Referral Model Results,37,Unilateral merger Effect Price goes up, Quantity go
25、es down,Merger Q as % of pre-merger Q,38,Merger Price effects as % of pre-merger price,39,40,Talk Outline,Empirical Finding Revenue Management Heuristics Which Theory can explain the finding? Post-merger information sharing Post-merger referrals to sister hotels Post-merger loyalty to merged hotel A
26、ntitrust Policy Mergers “Call arounds”,41,Repeat business and customer loyalty,This walking guests is particularly important because hotels are always wary of walking guests to a property they may not win them back from! Manager, Mandarin Oriental, Washington DCWe take the viewpoint that referrals a
27、re good. When we receive a walked guest this is viewed as a new customer. We do everything to make them a regular guest of the property. Revenue Manager, Jurys Washington Hotel, Washington, DC,42,Model of Loyalty Demand,Pre-merger demand for customer who visited choice 1 last period.Post-merger dema
28、nd for customer who visited choice 1 last period (loyalty accrues to merged hotel),43,Demand Recursion Equations (to compute steady state demand),44,Pre-mergerPost-merger,Loyalty Results,Usual unilateral effect: Price goes up, Quantity goes down,45,Talk Outline,Empirical Finding Hotel mergers reduce
29、 P and increase Q Revenue Management Heuristics Which theory can explain the finding? Post-merger information sharing Post-merger referrals to sister hotels Post-merger loyalty to merged hotel Antitrust Policy Mergers “Call arounds”,46,Antitrust Policy: Mergers,Parking, cruise lines, hotel/casinos,
30、hospitals In short run, empirical results suggest a short run gain Consistent with info-sharing; not consistent with referrals or loyalty In long run, with capacity adjustment, mergers may be anti-competitive, but Entry Product repositioning,47,Do “Call-arounds” = Collusion?,Investigation of high-en
31、d Paris hotels followed TV show. Ritz employee explained (on-camera) how regularly exchanging data helped each hotel analyze competitors. Competition Council: “Although the six hotels did not explicitly fix prices, they operated as a cartel that exchanged confidential information which had the result of keeping prices artificially high” Fines from $65,000 to $292,000 for the Crillon Over-deterrence? EU managers now afraid to share info. Hotel execs : call-arounds used for forecasting And “to bring more people to the area and to maximize hotel utilization”,
