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

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. ∗Federal Trade Commission, Bureau of Economics, 600 Pennsylvania Ave., Washington, DC, 20580. [email protected]. The opinions expressed here are those of the author and not necessarily those of the Federal Trade Commission or any of its Commissioners. Versions of the paper – the third chapter of my dissertation at the University of Michigan – previously circulated with the title “Brand Effects and Entry Deterrence: An Examination of Spatial Preemption.” I am particularly grateful for comments from my committee – Francine Lafontaine, Thomas Lyon, Brian McCall, and Uday Rajan. In addition, I thank Anne Fleischer, Renata Kosova, Emek Basker, Dan Hosken as well as other colleagues at the Federal Trade Commission, and audiences at the Econometric Society World Congress in Shanghai, the American Economic Association 2011 Annual Meeting, and various departmental seminars for their helpful comments. The usual caveat applies.