Branding, Cannibalization, and Spatial Preemption: An Application to the Hotel Industry

Federal Trade Commission Bureau of Economics Working Paper No. 309

48 Pages Posted: 16 Nov 2011

See all articles by Nathan Wilson

Nathan Wilson

Government of the United States of America - Federal Trade Commission, Bureau of Economics

Date Written: November 15, 2011

Abstract

In many settings where spatial preemption might be expected to produce tightly concentrated industry structures, firms share the market instead. Using a strategic investment model, I show that this can be rationalized by heterogeneous brand preferences, which cause new product introductions by incumbent firms to disproportionately cannibalize sales from existing affiliated products. I then present an empirical example using data on the branded segment of the lodging industry, which has many characteristics associated with spatial preemption, but is also characterized by strong brand-preferences. Consistent with the theoretical model, I find large within-firm revenue cannibalization effects from new hotel openings. These effects are attenuated -- but not removed -- by brand-proliferation strategies. Moreover, I find evidence that the industry practice of franchising through non-exclusive contracts softens inter-firm competition. Analyses of growing hotel markets support the conclusion that intra-firm cannibalization inhibits spatial preemption. Growth is far more likely to occur as a result of entry than expansion.

Keywords: Spatial preemption, franchising, brand preferences, cannibalization

JEL Classification: D2, L10, L22, L25

Suggested Citation

Wilson, Nathan, Branding, Cannibalization, and Spatial Preemption: An Application to the Hotel Industry (November 15, 2011). Federal Trade Commission Bureau of Economics Working Paper No. 309. Available at SSRN: https://ssrn.com/abstract=1959897 or http://dx.doi.org/10.2139/ssrn.1959897

Nathan Wilson (Contact Author)

Government of the United States of America - Federal Trade Commission, Bureau of Economics ( email )

600 Pennsylvania Avenue, NW
Washington, DC 20580
United States
202 326 3485 (Phone)

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