Organizational Form and Performance: Evidence from the Hotel Industry

We use a unique proprietary monthly panel data set on the operations of a large hotel firm to study the effect of vertical integration decisions on the pricing and performance (occupancy rate and RevPar) of individual hotels. Aggregate data patterns – which managers pay most attention to – suggest sizeable performance differences between franchised and non-franchised hotels. However, empirical analyses controlling for observable and unobservable characteristics show that if significant at all, such differences are economically much smaller than what mean comparisons suggest. Furthermore, once we endogenize the choice of organizational form using information about the Company’s other hotels in the same local market, the differences are both statistically and economically insignificant. We conclude that the Company chooses which hotels to franchise and to own optimally such that, conditional on hotel and market characteristics, it achieves consistent results – in terms of revenues per room, occupancy rates, and prices – on average across the two sets of hotels.