DRAFT—DO NOT CITE Mergers Increase Output in a Revenue-Management Industry

1. DRAFT—DO NOT CITEMergers Increase Output ina Revenue-Management Industry Arturs Kalnins Cornell School of Hotel Administration Luke M. Froeb, Steven Tschantz+ Vanderbilt University

2. I. Antitrust in Industries whereFirms Manage Revenue • 1999 Central Parking $585 Million acquisition of Allright. • Divestitures in 17 cities • Froeb et al. (2002) criticize the Justice Department's enforcement action by arguing that the merger would not have raised price because there is very little uncertainty about parking demand.  • Firms price to fill capacity, pre- and post-merger

3. Antitrust in Industries whereFirms Manage Revenue (I) • 1999 Central Parking $585 Million acquisition of Allright. • Divestitures in 17 cities • Froeb et al. (2002) criticize the Justice Department's enforcement action by arguing that the merger would not have raised price because there is very little uncertainty about parking demand.  • Firms price to fill capacity, pre- and post-merger

4. Antitrust in Industries whereFirms Manage Revenue (II) • 2003, the European Commission (EC) gave their approval to Carnival's $5.5 billion takeover of rival cruise operator P&O Princess • Followed UK and US approvals • Coleman et al. (2003) summarized the empirical analysis done by the FTC, • no correlation between prices and concentration • no correlation between changes in capacity and changes in price. • firms were adding capacity, increasing amenities, and competing on price

5. Antitrust in Industries whereFirms Manage Revenue (III) • 2005, six luxury hotels in Paris exchanged information about occupancy, average room prices, and revenue • French competition agency: "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" (Gecker, 2005) • industry executives insisted that their information sharing was to "to bring more people to the area and to maximize hotel utilization"

6. Revenue Management: set price before demand is realized • Firm optimizes expected demand:   • Non linearity of min() function means that capacity constrained firm “shades” price to minimizeexpected error costs • Over-pricing means unused capacity • Under-pricing means foregone revenue

7. Testable hypotheses

8. Data • Price and occupancy data from Smith Travel Research (STR). • 32,314 U.S. hotels reported to STR the average room-night price actually received each day, as well as the total number of rooms available and the number of rooms sold. • 97 monthly observations from 2001 –2009 for each hotel for occupancy and price. • These 32,314 hotels represent about 95% of chain-affiliated properties in the United States and about 20% of independent hotels and motels.

9. Analysis of all 2628 mergers • Huber-White standard errors in parentheses, clustered by hotel*brand combination. • ** p < 0.01; * p < 0.05; + p < 0.10 as per two-tailed tests

10. Market tracts split by capacity constraints and then by uncertainty • Huber-White standard errors in parentheses, clustered by hotel*brand combination. • ** p < 0.01; * p < 0.05; + p < 0.10 as per two-tailed tests

11. High Capacity Constraints & Low/High Uncertainty • Huber-White standard errors in parentheses, clustered by hotel*brand combination. • ** p < 0.01; * p < 0.05; + p < 0.10 as per two-tailed tests

12. Low Capacity Constraints & Low/High Uncertainty: No signif. results • Huber-White standard errors in parentheses, clustered by hotel*brand combination. • ** p < 0.01; * p < 0.05; + p < 0.10 as per two-tailed tests