Faculty & Research
CONFRONTING "SEARCH AND SWITCH": CORNELL RESEARCH REPORT PROPOSES "EXOTIC OPTION" FOR HOTEL RESERVATIONS
FOR IMMEDIATE RELEASE
Joe Strodel, Jr., 607-255-4646, js343@cornell.edu
ITHACA , NY, September 15, 2005 -- Given the many internet sites offering discounted hotel rooms, price-driven customers have adopted a "search and switch" approach to hotel reservations. Guests make a room reservation, but then keep searching the internet for a lower rate-thereby depriving hotels of control over their distribution system. Because of that model, hotel chains are seeking ways to discourage "search and switch" so that they can maintain their pricing structure. A new report from the Cornell Center for Hospitality Research proposes an option-based strategy to counter "search and switch" that should be attractive to both hotel operators and to price-sensitive guests. (To access the report, Low-price Guarantees: How Hotel Companies Can Get It Right, please visit: http://www.hotelschool.cornell.edu/research/chr/pubs/reports/.)
The strategy, developed by Cornell Hotel School professors Steven Carvell, Ph.D. and Daniel Quan, Ph.D., involves valuing a room reservation as though it were a futures option. Looking at Carvell and Quan's findings, Lee Pillsbury, chairman and CEO of Thayer Lodging Group commented: "This is some of the best research I've seen come out of Cornell. The underlying work is rigorous and thorough, and the analysis is sound. The findings are important and compelling, and certainly deserve a wide airing within the hospitality industry."
Carvell and Quan point out that hotel companies are essentially giving guests a free option on a room at a particular price. Current low-price guarantees offered by hotel chains are a step in the right direction, according to the report, but those guarantees do not prevent search and switch because they are too limited.
Instead, Carvell and Quan demonstrate a formula that sets an actual dollar value on the guarantee of the lowest-price reservation. A guest who wants to be assured of paying the lowest price during the entire length of the reservation (not just 24 hours) would pay the value of the option and would need to search no further. The value of the option is based on well-established option formulas, so that the best-rate guarantee would provide value to the consumer. By purchasing the option the guest would gain the lowest price posted on a specified set of web sites, right up to the time the guest arrives at the hotel.
| Steven Carvell, Ph.D. | Daniel Quan, Ph.D. |
The report shows how to price this best-rate guarantee in a way that consumers should be willing to pay for the option. The farther in advance the reservation, the greater the value of the option-given the uncertainty of room rates. Using this approach hotel companies should be able to eliminate the incentive for consumers to engage in search-and-switch behavior, reestablish the price integrity of their product, and simultaneously create a revenue stream from the sale of the best-rate-guarantee options to their customers.
These and all CHR Reports and Tools are available from the Center's web site, http://www.thecenterforhospitalityresearch.org/. Thanks to the support of partners listed below, all CHR Reports are made available free of charge.
About the Center for Hospitality Research
A unit of the Cornell School of Hotel Administration, The Center for Hospitality Research (CHR) sponsors research designed to improve practices in the hospitality industry. Under the lead of the Center's 40 corporate affiliates, experienced scholars work closely with business executives to discover new insights into strategic, managerial and operating practices. The Center also publishes the award-winning hospitality journal, the Cornell Hotel and Restaurant Administration Quarterly. To learn more about CHR and its projects, visit http://www.thecenterforhospitalityresearch.org/.
CHR Partners and sponsors: AIG Global Real Estate Investment Corp., Cendant Corporation, Four Seasons Hotels and Resorts, HVS International, JohnsonDiversey, Inc., Kohinoor Group, Marsh's Hospitality Practice, Nestlé, Smith Travel Research, Southern Wine and Spirits of America, Inc., Taj Hotels Resorts and Palaces, and Thayer Group of Companies.
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