"Organizational Form, Information Asymmetry, and Market Prices"
Publication type: Working paper
Vertical integration can affect the information structure of firms in the downstream market. In the hotel industry, properties managed by headquarters have increasingly more precise information about uncertain market demand. We develop a simple model of pricing under incomplete information where decision makers are uncertainty averse and use decision making rules that are robust to uncertainty. The model predicts that franchised hotels reduce prices by a larger amount than chain managed properties in the same market in the lead up to the date of stay. Empirical evidence from over 800 properties across the US belonging to 6 brands, over three different time periods, shows that franchised hotels exhibit a negative relative price trend, consistent with the predictions of the model. Alternative explanations arising from other consequences of variation in organizational form, including joint pricing across chain managed properties in the same market, are unable to explain these findings. In this setting of information asymmetry and uncertainty aversion, heterogeneity in organizational form in an oligopolistic market is associated with lower price levels in both integrated and non-integrated downstream firms since prices are strategic complements.
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