Toward a Theory of the Intraurban Market for Hotel Services

The article proposes a discrete choice framework for looking at the intraurban market for hotel services. Like most real estate products, hotel services are highly differentiated. Thus, every hotel operator faces a downward-sloping demand function and, in line with microeconomic tradition is assumed to select a profit-maximizing room price. Optimal price determines quantity of services and thus also fixes the optimal occupancy. The demand for a given hotel's services is a product of the urban area's total hotel market size and the hotel's discrete-choice market-share function. Profit maximization cannot be computed in closed form; therefore, it is simulated. Simulations yield optimal room price as well as occupancy, for high-, medium-, and low-quality hotels, while keeping size constant. As expected, simulation results show that high-quality hotels are constrained by size, especially when the market is up. Those of low quality are constrained by insufficient demand, especially when the market is down.