Being better vs. being different: Differentiation, competition, and pricing strategies in the Spanish hotel industry Manuel Becerra * , Juan Santaló, Rosario Silva IE Business School, Alvarez de Baena 4, 28006 Madrid, Spain article info Article history: Received 4 October 2011 Accepted 23 March 2012 Keywords: Differentiation Competition Prices Hotel industry abstract We study the effects of vertical and horizontal differentiation on pricing policy in a large sample of hotels in Spain. We show that hotels with more stars (i.e., vertically differentiated) offer smaller discounts over listed prices, in addition to charging higher prices. Similarly, hotels that belong to a branded chain (i.e., horizontal differentiation) also charge higher prices and provide smaller discounts. We show how the degree of local competition moderates the effect of differentiation on pricing policy, but only for vertical differentiation. Differentiation indeed protects hotels from the pressure to reduce prices as competition increases, but being better seems to be more effective than just being different. Ó 2012 Elsevier Ltd. All rights reserved. 1. Introduction Product differentiation has been widely regarded as one way for firms to isolate themselves from the pressure of competitors and thus obtain superior performance (Bain, 1956; Dickson & Ginter, 1987; Porter, 1980). Defining long ago this critical concept in firm strategy, prominent economist Edward Chamberlin noted that “A general class of product is differentiated if any significant basis exists for distinguishing the goods of one seller from those of another and leads to a preference for one variety of the product over another” (Chamberlin, 1933: 56). However, despite its importance, there is only scarce empirical research that investigates which types of product differentiation isolate firms more effectively from compet- itive forces (Porter, 1980). In this paper we try to fill this gap by analyzing the effect of two distinct differentiation strategies, vertical and horizontal, on pricing policies in the hotel industry. Several empirical studies in the hotel industry have documented the benefits of differentiation (Baum & Mezias, 1992; Garrigós- Simón & Palacios Marqués, 2004), which can be viewed as a barrier to entry or, more generally, a generic source of competitive advantage in sharp contrast to cost leadership. Some authors believe that all competitive strategies, including cost leadership, involve a certain differentiation of the firm’s products and services versus its competitors in some way (Mintzberg, 1988). Extant research has focused primarily on the contrast between cost lead- ership and differentiation, usually exploring whether they do exist as alternative choices for firm strategy and their implications for performance (Campbell-Hunt, 2000). The positive effects of differentiation in protecting firms from competition have been widely accepted since Porter (1980), but the conditions under which they do so have not been investigated empirically yet. We study the isolating effect of differentiation strategies from competitive pressures in the context of the Spanish hotel industry. According to the World Tourism Organization, Spain was one of the main destinations in the world in 2010 in terms of arrivals and the second in international tourism receipts after the US (World Tourism Organization, 2011). Tourism’s contribution to Spanish gross domestic product (GDP) is estimated at 10%, whereas worldwide is around 5%. Similarly, tourism’s contribution to Spanish employment represents 10.8% of the overall number of jobs, while worldwide is estimated in order of 6e7% (Instituto de Estudios Turísticos, 2011; World Tourism Organization, 2011). The Spanish hotel industry is a particularly appropriate context to conduct this study because it provides a rich setting across a large number of geographical locations with varying levels of competi- tive rivalry for which there are publicly available statistics of listed prices, discounts, and features for hotel differentiation. Looking at the extant literature, our knowledge is still limited with regard to how much the options for differentiation can isolate hotels from the negative effects of competition on prices. Though the effect of specific hotel features on room prices has been the subject of abundant empirical research (Bull, 1994; Espinet, Saez, Coenders, & Fluvià, 2003; Haroutunian, Mitsis, & Pashardes, 2005; Rigall-I-Torrent & Fluvià, 2011; Thrane, 2005), we do not know the extent to which alternative types of differentiation can protect hotels from the pressure to reduce prices when competition in their * Corresponding author. Tel.: þ34 91 568 9600. E-mail addresses: manuel.becerra@ie.edu (M. Becerra), juan.santalo@ie.edu (J. Santaló), charo.silva@ie.edu (R. Silva). Contents lists available at SciVerse ScienceDirect Tourism Management journal homepage: www.elsevier.com/locate/tourman 0261-5177/$ e see front matter Ó 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.tourman.2012.03.014 Tourism Management 34 (2013) 71e79