THE ENDURING VALUE OF FLEXIBILITY: HOTEL PRICING DYNAMICS AND BEHAVIORAL CONSUMER RESPONSES TO RISK MITIGATION OPTIONS

• Dr. Corwin E. Lasteur

  School of Hotel Administration, Cornell SC Johnson College of Business, Cornell University, Ithaca, United States

  Author

• Dr. Mirena J. Valtrice

  Department of Tourism and Service Management, Modul University Vienna, Vienna, Austria

  Author

Have you ever wondered why that "flexible" hotel room always seems to cost a bit more, even when your trip is just around the corner and you're pretty sure you won't cancel? This article dives into that very question. While traditional economics often assumes we're all perfectly rational decision-makers, real-world observations show that our emotions and biases play a huge role in how we choose. We'll explore how hotels navigate this fascinating landscape, blending smart pricing strategies with an understanding of what makes us, the customers, tick. We'll look at how dynamic pricing works, why we feel certain prices are "fair," and the practical realities hotels face when they want to change their rates. By bringing together insights from behavioral science, revenue management, and business strategy, this study aims to give you a clearer picture of these complex market forces and offer some practical takeaways for anyone in the hospitality business.

1. Akerlof, G. A., & Yellen, J. L. (Eds.) (1986). Efficiency wage models of the labor market. Cambridge University Press.

2. Alderighi, M., Gaggero, A. A., & Piga, C. A. (2022). Hidden prices with fixed inventory: Evidence from the airline industry. Transportation Research Part B: Methodological, 157, 42–61.

3. Alderighi, M., Nicolini, M., & Piga, C. A. (2015). Combined effects of load factors and booking time on fares: Insights from the yield management of a low‐cost airline. Review of Economics and Statistics, 97, 900–915.

4. Anagol, S., Balasubramaniam, V., & Ramadorai, T. (2018). Endowment effects in the field: Evidence from India's IPO lotteries. Review of Economic Studies, 85(4), 1971–2004.

5. Anderson, E. T., & Simester, D. I. (2010). Price stickiness and customer antagonism. Quarterly Journal of Economics, 125(2), 729–765.

6. Bachis, E., & Piga, C. A. (2011). Low‐cost airlines and online price dispersion. International Journal of Industrial Organization, 26(6), 655–667.

7. Barnett, W., & Pontikes, E. (2008). The red queen, success bias, and organizational inertia. Management Science, 54(7), 1237–1251.

8. Bruhin, A., Fehr‐Duda, H., & Epper, T. (2010). Risk and rationality: Uncovering heterogeneity in probability distortion. Econometrica, 78(4), 1375–1412.

9. Cavallo, A. (2017). Are online and offline prices similar? Evidence from large multi‐channel retailers. American Economic Review, 107(1), 283–303.

10. Cavallo, A. (2018). Scraped data and sticky prices. Review of Economics and Statistics, 100(1), 105–109.

11. Cavallo, A., Diewert, E., Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2018). Using online prices for measuring real consumption across countries. AEA Papers and Proceedings, 108, 483–487.

12. Chetty, R. (2006). A new method of estimating risk aversion. American Economic Review, 96(5), 1821–1834.

13. Cho, S., Lee, G., Rust, J., & Yu, M. (2018). Optimal dynamic hotel pricing. Meeting Paper 179, Society of Economic Dynamics.

14. Choi, S., & Mattila, A. S. (2003). Hotel revenue management and its impact on customers' perception of fairness. Journal of Revenue and Pricing Management, 2(4), 303–314.

15. DellaVigna, S., & Gentzkow, M. (2019). Uniform pricing in U.S. retail chains. Quarterly Journal of Economics, 134(4), 2011–2084.

16. Dutta, S., Zbaracki, M., & Bergen, M. (2003). Pricing process as a capability: A resource‐based perspective. Strategic Management Journal, 24, 615–630.

17. Eliaz, K., & Spiegler, R. (2008). Consumer optimism and price discrimination. Theoretical Economics, 3(4), 459–497.

18. Ellison, G. (2005). A model of add‐on pricing. Quarterly Journal of Economics, 120(2), 585–637.

19. Escobari, D. (2012). Dynamic pricing, advance sales, and aggregate demand learning in airlines. Journal of Industrial Economics, 60(4), 697–724.

20. Escobari, D., & Jindapon, P. (2014). Price discrimination through refund contracts in airlines. International Journal of Industrial Organization, 34(3), 1–8.

21. Falk, M., & Vieru, M. (2018). Modelling the cancellation behaviour of hotel guests. International Journal of Contemporary Hospitality Management, 30(10), 3110–3116.

22. Gabaix, X., & Laibson, D. (2006). Shrouded attributes, consumer myopia, and information suppression in competitive markets. Quarterly Journal of Economics, 121(2), 505–540.

23. Gallego, G., & Şahin, O. (2010). Revenue management with partially refundable fares. Operations Research, 58(4), 818–833.

24. Goldfarb, A., & Xiao, M. (2011). Who thinks about the competition? Managerial ability and strategic entry in US local telephone markets. American Economic Review, 101(7), 3130–3161.

25. Gorodnichenko, Y., Sheremirov, S., & Talavera, O. (2018). Price setting in online markets: Does IT click? Journal of the European Economic Association, 16, 1764–1811.

26. Gorodnichenko, Y., & Talavera, O. (2017). Price setting in online markets: Basic facts, international comparison, and cross‐border integration. American Economic Review, 107(1), 249–282.

27. Gorodnichenko, Y., Talavera, O., & Vu, N. (2021). Quality and price setting of high‐tech goods. Economic Modelling, 98, 69–85.

28. Hannan, M., & Freeman, J. (1977). Structural inertia and organizational change. American Sociological Review, 82(5), 929–964.

29. Hannan, M., & Freeman, J. (1984). The population ecology of organizations. American Journal of Sociology, 49, 149–164.

30. Hartley, R., Lanot, G., & Walker, I. (2014). Who really wants to be a millionaire? Estimates of risk aversion from gameshow data. Journal of Applied Econometrics, 29(6), 861–879.

31. Heidhues, P., & Kőszegi, B. (2008). Competition and price variation when consumers are loss averse. American Economic Review, 98(4), 1245–1268.

32. Heidhues, P., & Kőszegi, B. (2010). Exploiting naivetè about self‐control in the credit market. American Economic Review, 100(5), 2279–2303.

33. Heidhues, P., & Kőszegi, B. (2017). Naivetè‐based discrimination. Quarterly Journal of Economics, 132(2), 1019–1054.

34. Hollenbeck, B. (2017). The economic advantages of chain organization. RAND Journal of Economics, 48(4), 1103–1135.

35. Kahneman, D., Knetsch, J. L., & Thaler, R. (1986). Fairness as a constraint on profit seeking: Entitlements in the market. American Economic Review, 74, 728–741.

36. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263–291.

37. Karle, H., & Möller, M. (2020). Selling in advance to loss averse consumers. International Economic Review, 61(1), 441–468.

38. Katz, M. L. (1983). Non‐uniform pricing, output and welfare under monopoly. Review of Economic Studies, 50(1), 37–56.

39. Kosova, R., & Lafontaine, F. (2012). Much ado about chains: A research agenda. International Journal of Industrial Organization, 30(3), 303–308.

40. Kosova, R., Lafontaine, F., & Perrigot, R. (2013). Organizational form and performance: Evidence from the hotel industry. Review of Economics and Statistics, 95(4), 1303–1323.

41. Kőszegi, B., & Rabin, M. (2006). A model of reference‐dependent preferences. Quarterly Journal of Economics, 121(4), 1133–1166.

42. Kőszegi, B., & Rabin, M. (2007). Reference‐dependent risk attitudes. American Economic Review, 97(4), 1047–1073.

43. Levinthal, D. (1997). Adaptation on rugged landscapes. Management Science, 43(7), 934–950.

44. List, J. (2003). Does market experience eliminate market anomalies. Quarterly Journal of Economics, 118(1), 41–71.

45. Mantovani, A., Piga, C. A., & Reggiani, C. (2021). Online platform price parity clauses: Evidence from the EU Booking.com case. European Economic Review, 131, 103625.

46. Melis, G., & Piga, C. A. (2017). Are all hotel prices created dynamic? An empirical assessment. International Journal of Hospitality Management, 67, 163–173.

47. Nakamura, E., & Steinsson, J. (2008). Five facts about prices: A reevaluation of menu costs models. Quarterly Journal of Economics, 123(4), 1415–1464.

48. Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Princeton University Press.

49. Nicolini, M., Piga, C. A., & Pozzi, A. (2023). From uniform to bespoke prices: Hotel pricing during EURO 2016. Quantitative Marketing and Economics, 21, 333–355.

50. Piga, C. A., & Melis, G. (2021). Identifying and measuring the impact of cultural events on hotels' performance. International Journal of Contemporary Hospitality Management, 33(4), 1194–1209.

51. Rabin, M. (2000). Risk aversion and expected‐utility theory: A calibration theorem. Econometrica, 68(5), 1281–1292.

52. Ritson, M., Bergen, M., Dutta, S., Levy, D., & Zbaracki, M. J. (2003). Shattering the myth of costless price changes. European Management Journal, 21(6), 663–669.

53. Sandroni, A., & Squintani, F. (2013). Overconfidence and asymmetric information: The case of insurance. Journal of Economic Behavior and Organization, 93, 149–165.

54. Schmalensee, R. (1981). Output and welfare implications of monopolistic third‐degree price discrimination. American Economic Review, 71(1), 242–247.

55. Sydnor, J. (2010). (Over) insuring modest risks. American Economic Journal: Applied Economics, 2(4), 177–199.

56. Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5(4), 297–323.

57. Vives, A., Jacob, M., & Payeras, M. (2018). Revenue management and price optimization techniques in the hotel sector: A critical literature review. Tourism Management, 24(6), 720–752.

58. Williams, K. R. (2022). The welfare effects of dynamic pricing: Evidence from airline markets. Econometrica, 90(2), 831–858.

59. Wu, G., & Gonzalez, R. (1996). Curvature of the probability weighting function. Management Science, 42(12), 1676–1690.

60. Zbaracki, M., Ritson, M., Levy, D., Dutta, S., & Bergen, M. (2004). Managerial and customer costs of price adjustment: Direct evidence from industrial markets. Review of Economics and Statistics, 86(2), 514–533.

• pdf

All articles published by The Parthenon Frontiers and its associated journals are distributed under the terms of the Creative Commons Attribution (CC BY 4.0) International License unless otherwise stated. 

Authors retain full copyright of their published work. By submitting their manuscript, authors agree to grant The Parthenon Frontiers a non-exclusive license to publish, archive, and distribute the article worldwide. Authors are free to:

• Share their article on personal websites, institutional repositories, or social media platforms.

• Reuse their content in future works, presentations, or educational materials, provided proper citation of the original publication.