The effects of location and other attributes on the price

The effects of location and otherattributes on the price of

products which are place-sensitive in demand

Adrian Osborn BullBA (Hons), MAITT

School of EconomicsFaculty of International Business and Politics

Griffith University

Submitted in fulfilment of the requirements of the degree ofDoctor of Philosophy

September 1998

ii

Abstract

There is a particular class of products where people must visit the point of

production in order to be consumers, and these products are normally lifestyle,

tourism or leisure services. Examples include environmentally-based leisure

facilities, housing, and tourist accommodation. Frequently the assertion is made

that location makes one product ‘superior’ to another, in terms of both its

production and consumption. This study enquires into the asserted significance of

location in product differentiation, with special reference to hospitality and

tourism products. The study is particularly concerned with commercially

tradeable products offered to a consumer market by a number of competitive

firms, rather than being concerned with one-off markets for assets for exclusive

use, such as houses.

By the use of characteristics theory, this study shows that the role of geographic

location within a product such as hotel accommodation is that of a product-

differentiating characteristic, or set of characteristics. However, the location of

such a product is an example of a fixed, or unalterable, characteristic, once a

supplier has entered a market. With most product-differentiating characteristics, a

supplier can attain an optimal business position by enhancing the differentiation

for as long as customers’ willingness to pay ‘the extra’ (marginal revenue)

exceeds or equals the cost (marginal cost) of product enhancement. However, a

supplier cannot easily do this for a fixed characteristic.

So what is the value of a particular location to a supplier of this type of product?

This study develops a model to identify the specific elements of a location that

are important to consumers, and then to estimate their values. It is argued that the

values of each specific element (locational characteristics) should contribute in a

predictable way to the overall price of each product in the market place. It is also

shown in this study that individual suppliers who cannot identify, or who

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incorrectly set, prices based on locational characteristics face a measurable

variation in demand from the mean in the market place.

The model and methodology are tested empirically in the market for

international-standard hotel accommodation on the Gold Coast, Queensland. It is

shown that this constitutes a single, coherent market as a tourist destination,

where a limited number of producers compete with differentiated products. Those

product characteristics that are important to the market are identified, and it is

shown that elements of location and other characteristics can be valued

accurately across the market. The relationship between suppliers’ ‘overpricing’ or

‘underpricing’ of their product characteristics and variations in demand from the

market average is explored.

This study therefore has implications for pricing strategy, as well as for land

valuation and planning. The study can be seen as contributing primarily to the

economics literature, in the area of industrial economics, but also to the

marketing, and hospitality and tourism literature.

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Table of Contents

Page

Chapter 1 Outline of the study 11.1 Introduction 1

1.2 The statement of the problem, definitions and issues 1

1.3 Background, and choice of empirical study 3

1.4 The role and contribution of this study 5

1.5 Review of contents 8

1.6 Study limitations 9

Chapter 2 The role of place-sensitivity as a locational

characteristic of products 112.1 Introduction 11

2.2 Products 11

2.3 Place-sensitive products 18

2.4 Location in economic theory 21

2.5 Hotel accommodation as a place-sensitive product 28

2.6 Conclusion 30

Chapter 3 Market structure and costs 323.1 Introduction 32

3.2 Market structures with differentiated products 32

3.3 Costs and supply of products at fixed locations 41

3.4 Market structure of the hotel industry 43

3.5 Costs and supply of hotel accommodation 49

3.6 Conclusion 55

Chapter 4 Demand for place-sensitive products 564.1 Introduction 56

4.2 Demand for the characteristics of products 56

4.3 Location as a demand characteristic of place-sensitive products 64

4.4 Consumer choice in tourism 67

4.5 Demand for international hotel accommodation on the Gold Coast 72

4.6 Conclusion 76

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Chapter 5 Analysis of alternative research methods 785.1 Introduction 78

5.2 Qualitative methods 79

5.3 Contingent valuation 81

5.4 Conjoint analysis 83

5.5 Hedonic pricing 91

5.6 An hedonic price model for fixed locational characteristics 99

5.7 Conclusion 104

Chapter 6 Empirical valuation of locational characteristics 1066.1 Introduction 106

6.2 The study area 106

6.3 Determination of product-differentiating characteristics 108

6.4 Consumer valuation of characteristics 118

6.5 Hedonic price estimation 123

6.6 Conclusion 127

Chapter 7 Results of the empirical study 1297.1 Introduction 129

7.2 Multiple regression analysis 129

7.3 Interpretation of the results of the empirical test 134

7.4 Interpretation of implicit prices for location and other fixed

characteristics 139

7.5 Underpricing and overpricing 141

7.6 Conclusion 144

Chapter 8 Conclusions, and directions for further research 1468.1 Introduction 146

8.2 Summary of the study 146

8.3 Implications for producers of place-sensitive products operating

within differentiated oligopoly 150

8.4 Directions for future research 153

8.5 Final note 157

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Appendices1 Issues in oligopoly theory relevant to the market for

place-sensitive products 158

2 Hotel grading scheme of Australian Motoring Organisations 160

3 International hotels and room types on the Gold Coast 161

4 Examples of hotel brochures / advertisements with location claims 162

5 Maps of the Gold Coast 163

6 International hotels on the Gold Coast: ownership (at start-up)

and opening dates 165

7 Locational characteristics featured in hotel brochures

on the Gold Coast 166

8 Questionnaire for survey to establish determinant characteristics 167

9 Characteristics survey: variables used in the analysis,

with mean rating scores 169

10 Results of the analysis of variance of views of hotel

characteristics between respondent types 170

11 Results of a factor analysis (by principal components) on ratings

of 28 characteristics of Gold Coast international hotels 173

12 Conjoint analysis data collection instrument 174

13 Conjoint analysis specification and results 175

References 176

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List of tables and figures

Tables Page

3.1 Breakdown of typical hotel accommodation costs 50

3.2 Sources of hotel revenue in the United States and Australia 52

4.1 “Place” characteristics found by indirect valuation to be determinant

in housing demand 66

4.2 Growth in tourist numbers to the Gold Coast, 1980-86 74

4.3 Ranking of importance of attractions of resort destinations to their main

tourist markets 75

5.1 Findings from empirical studies of hospitality products and their

locational characteristics 98

6.1 Factors extracted associated with variables’ factor loadings 117

6.2 Identification of factors 117

7.1 Basic results of multiple regressions: overall fit and parameter estimates 131

7.2 Multicollinearity: tolerance tests 132

7.3 Mean values for variables in the empirical study 134

Figures Page

4.1 Relationships in means-end models 61

5.1 Pricing decisions for the producers of bundled characteristics 103

6.1 Utility function for access to shops / centre 121

6.2 Utility function for access to the beach 121

6.3 Utility function for the view from a hotel room 122

7.1 Implicit price of distance from the beach 137

7.2 Implicit price of distance from the tourist centre 138

7.3 Hotel occupancy rates and roomrate pricing residuals 143

viii

Acknowledgments

I should like to acknowledge the help given by general managers and sales

managers of all the international-standard hotels on the Gold Coast, Queensland,

in providing access to hotel data and in many cases permitting survey work

amongst hotel guests. In particular I should like to thank Greg Anderson, Director

of Sales at the ANA Hotel, for his support.

Considerable thanks are also due to Associate Professor Christine Smith, of

Griffith University, and Professor Peter Graham, of Southern Cross University,

for their invaluable advice and help over a long period.

Statement of originality

This work has not previously been submitted for a degree or diploma in any

university. To the best of my knowledge and belief, the thesis contains no

material previously published or written by another person except where due

reference is made in the thesis itself.

_________________________

Outline of the study 1

Chapter 1. Outline of the study

1.1 Introduction

This study enquires into the asserted significance of location in product

differentiation, with special reference to hospitality and tourism products.

Chapter 1 sets out the nature of the study and its objectives, together with the

background to, and rationale for, the work. Details are provided of the academic

setting, and the specific contribution that this study makes to the literature.

Finally, section 1.5 reviews the structure and contents of the study, whilst section

1.6 acknowledges its limitations.

1.2 The statement of the problem, definitions and issues

The central aim of this study is to investigate the role of a geographic location as

a product-differentiating characteristic, or set of characteristics, of a particular

class of products. These products, which it will be demonstrated are normally

services, are those:

a) that are produced, traded and consumed at the same physical location (so the

supplier must be located at the same point at which consumption takes place)

b) that are produced continuously and supplied competitively

c) where the specific location at which the product is produced and consumed is

an intrinsic characteristic of the product in such a way that it influences

consumer utility.

Such products are defined throughout this study as place-sensitive products. This

nomenclature and definition varies slightly from, for example, the term “location-

specific goods” (Osborne & Smith 1996) which can include public goods. For

place-sensitive products, the implication of condition b) above is that they are

tradeable products rather than assets for exclusive use such as houses. In


addition, the three conditions imply that the location element is both a factor

input to production and a fixed product differentiator with a fixed cost (and

therefore zero marginal cost). Further discussion of the nature of place-sensitive

products is in section 2.3.1.

This study does not test a specific hypothesis but sets out to investigate the

proposition that a price for a location as a fixed product characteristic (of

products that are place-sensitive in demand) can be isolated and related to market

conditions. The study then examines the implications of such a price for

producers of differentiated products.

Characteristics are defined here as the features of a product that may provide

certain benefits for the consumer. The term generally used in marketing literature

is ‘product attributes’, whilst characteristics is the term generally used in

economics literature, since ‘attributes’ have a different meaning. To avoid

confusion, the convention throughout this study is to use the same term. Fixed

characteristics are defined as those product features that a producer cannot vary

once the decision to produce has been made, whereas variable characteristics are

features that producers can alter as part of product redesign or development.

Although this study concentrates on location as a characteristic, the model and

discussion that are developed apply to any form of fixed characteristic.

The subsidiary proposition in this study argues that individual suppliers of place-

sensitive products who cannot identify, or who incorrectly set, location-prices

face a measurable variation in demand from the mean in the market place. In

terms of pricing strategy, this implies that producers should be aware of the fact

that they are selling a place-sensitive product as a bundle of characteristics, and

that consumers may have a reservation price, or maximum valuation, that they

place on each characteristic. Then ‘overpricing’ or ‘underpricing’ of these

characteristics may lead to a lack or excess of demand for the product as a whole.

It will be shown in chapter 3 that place-sensitive products are likely to involve

capacity constraints and high fixed costs, so that demand management is a key to


profitability. It is assumed throughout this study that suppliers are profit

maximisers.

1.3 Background, and choice of empirical study

This study arose out of research on competition and marketing within the

hospitality industry. Hoteliers and industry commentators have from time to time

made assertions on what they see as key variables in business success, and one of

the most common assertions is the importance of a hotel’s location:

“The three most important factors in the success of a hotel are:

location, location, location” - attributed to the hotelier Statler

(Arbel & Pizam 1977 :18), but also attributed to Conrad Hilton

(Lowe & Kruger 1991; Oppermann & Brewer 1996: 284). The

assertion may well be attributed to many others.

Further comment ranges from assertions to the findings from market research

within the industry:

“The history of the development of the hotel industry shows how important

location is to the success of an accommodation unit. Being in the most prominent

or the best location for a particular type of customer is one of the key influences

on the success of any accommodation unit.” (Cooper et al. 1993 :168)

“...location is the single most important factor influencing hotel selection by all

business travelers.” (McCleary et al. 1993 :46)

“Travelers want a convenient location and since the hotel industry is fiercely

competitive and highly homogenous in terms of service, convenience, as well as

the alternatives available to the traveler, should be a significant factor in

consumers’ future purchase behavior.” (Clow et al. 1994 :57)


Hoteliers and commentators clearly believe then that location is important for a

hotel, and have market research evidence to support this. However, almost

nothing has been done to enable this issue to be incorporated into producers’

strategic decision making other than at the stage of property feasibility and

investment appraisal. In particular, there is a gap in the literature relating to

analysis from a supply-side approach. The background impetus to this study

therefore was the perceived need to investigate what location and other fixed

characteristics really are worth within the market place. The perspective chosen

is echoed by Stanton & Aislabie (1992) who, in writing about resorts, note that

the resort product has the characteristics of fixity in geographical space and that:

“..location is also part of the consumption package. It provides characteristics of

which tourists may prefer to have more or less.” (Stanton and Aislabie op.cit.

:439).

The general literature on product differentiation and characteristics then provides

a useful theoretical framework. These topics are treated in academic literature

from marketing, economics, and occasionally other disciplines such as as

accounting or geography; the interdisciplinary nature of the topic implies

problematics in blending definitions and approach, but enhances the

opportunities for validation. Accumulated evidence, which will be detailed in

reviews of literature in chapters 2, 3 and 4, suggests the following:

a) Product differentiation can be vertical, differentiating products by quality, or

horizontal, through the offering of different characteristics

b) Characteristics may be variable or fixed, both in type (horizontal) and quality

level (vertical)

c) Services in particular may be place-sensitive in demand (therefore they

possess at least one location characteristic); this is particularly so for products

involving the ‘consumption’ of specific places, including products such as

housing, tourism and recreation

d) Once a supplier of place-sensitive products starts trading, location is a fixed

characteristic of that supplier’s product.


The market for international-standard hotel accommodation shows both

horizontal and vertical product differentiation for a product which is basically a

service. It also involves consumption of specific places. Unlike the housing

market, it involves the continuous supply of the same products, and unlike the

rental market the supply is in the hands of relatively few firms. The Gold Coast in

Queensland, Australia is selected as a case study of a geographically

homogeneous supply area with a small number of firms, and it is chosen to test

the model that is developed in this study.

In line with standard definitions in the literature on hospitality and tourism (see,

for example Holloway (1994)), the definition here of tourists, who are the

consumers of the accommodation products, includes those who are away from

home for both business and recreational purposes. In chapters 4 and 6 there is an

investigation of any differences between business and recreational tourists that

affect product characteristics sought, and hence whether separate market

segments need to be specified. For the empirical study, the hotel accommodation

product is defined as the rental of a fully-serviced room or unit in a hotel or resort

of international standard. The unit of product is the use of the room for one night,

or one roomnight. The Gold Coast offers a particular advantage as a choice of

case study since the majority of tourists stay for two or more nights, whereas in

some markets there is a mixture of ‘staying’ tourists’ and transit visitors for

whom the only important locational characteristic of accommodation is likely to

be the need for convenient transit accessibility (Mayo 1974).

1.4 The role and contribution of this study

1.4.1 Academic setting

As noted in section 1.3 above, a number of disciplines have contributed ideas,

theories and research applications to the area of products, characteristics and

location. In particular, economists are concerned both with the role of

characteristics as generators of utility and hence influencing demand, as based on


the work of Lancaster (1966), and with product differentiation and competition as

part of industrial economics. The major positioning of this study is within the

economics literature as a contribution to industrial economics, in the area of

differentiated products and hedonic pricing of product characteristics.

The topic is of interest also in marketing, with respect particularly to consumer

behaviour, the evaluation of product attributes or characteristics by consumers,

and pricing strategy. The marketing literature is richer in techniques such as the

determination of evaluative criteria by consumers making a purchase decision,

and this study draws from the marketing discipline in the area of behavioural

research and the rigorous identification of determinant variables (here,

characteristics). By comparison, economists’ techniques are frequently ad hoc.

Because of the empirical area of investigation, it is important also to draw upon

the knowledge recorded in the applied studies of hospitality and tourism

management. The disciplinary paradigms that are relevant here are those that

relate to strategic optimisation, both for commercial suppliers and planners

involved with, for example, destination area management. Reference is made in

later chapters to some of the ‘distinct characteristics’ conceptualised in the study

of tourism (Bull 1991 :xiv), such as capacity constraints, the need for consumers

to attend physically the site of production, and the nature of hotel accounting.

Spatial geographical perspectives are not employed in this study. It is recognised

that the topic is of interest to geographers and regional analysts such as

researchers in spatial choice (see, for example, Golledge & Timmermans (1990);

Timmermans & Golledge (1990)). It is also of interest to those concerned with

the morphology of tourism destinations, such as Miossec (1977), Yokeno (1968)

and Ashworth & Tunbridge (1994). However, their work employs distinctly

different paradigms and a different focus from that of this study, although it is

noted in chapter 8 that the results here could be of value in the provision of data

for such areas as GIS modelling or location feasibility for investment appraisal.


1.4.2 Contribution to the field

This study makes a specific contribution principally to the field of industrial and

managerial economics, with implications for marketing.

Within the literature on product differentiation and hedonic pricing, it develops a

variation to existing hedonic price models. This variation is the explicit

separation of fixed characteristics from variable characteristics within the model.

The differences in interpretation of implicit marginal prices for the two types of

characteristic are explored, together with the resulting implications for producers

operating within a market structure of differentiated oligopoly.

The study also demonstrates that it is possible to undertake an empirical

valuation of location and other characteristics of place-sensitive products. It

identifies the implicit prices of both fixed and variable characteristics within a

specific market place, and establishes whether or not the prices of fixed

characteristics can represent equilibrium market-clearing prices.

Thirdly, this study is also distinctive in the use of a three-stage sequential

methodology to provide, validate and analyse data. It uses an exploratory

qualitative and content analysis, with data reduction by factor analytic

procedures, to determine the variables for analysis. Then, the characteristics are

subjected to a conjoint analysis, based on procedures from the area of marketing

research, to validate the data and to establish the general functional forms of

utility for the characteristics. This provides a rigorous specification of variables

and functional form for the final stage of testing the hedonic model developed

here.

Therefore, it is argued that whilst the study fits primarily within the literature on

product differentiation and hedonic analysis, it also has relevance to marketing

research methods and to literature on hospitality and tourism management, in the

development of some distinctive new methodological approaches.


1.5 Review of contents

This study consists of eight chapters including this introductory first chapter.

Chapter 2 defines products, product differentiation and characteristics, with

particular reference to services. It examines the academic literature on the

components of location of place-sensitive products, and finds that these

components may be generally divided into access, site and neighbourhood

characteristics. There follows a discussion on the role of location in economic

theory, both in terms of location in product space and a firm’s physical location.

The latter is considered with particular reference to tourism and hotels.

Chapter 3 reviews theories of market structures with differentiated products, in

order to determine the nature of market structure for place-sensitive products. It

is shown that firms are likely to operate with capacity constraints and a high

proportion of fixed costs, and there is likely to be imperfect market knowledge

amongst consumers. These issues are related to the hotel industry in general, and

become the structural paradigmatic setting for the empirical case study of the

Gold Coast hotel market.

Chapter 4 analyses the demand for place-sensitive products. An integration of

consumer behaviour theory and characteristics theory is developed and applied to

consumer demand for locational characteristics. The chapter cites literature to

emphasise the importance of these characteristics for tourists staying at hotels,

within the context of a tourist’s chain of purchasing choices. Finally, there is a

description of the development of the hotel industry on the Gold Coast, which

highlights the issues of cost, location and stated consumer preferences which

have been developed throughout chapters 2, 3 and 4.

Chapter 5 provides an analysis of alternative research methods available to

operationalise the concepts presented in previous chapters. It summarises the

strengths and weaknesses of work presented in the literature relating to locational


characteristics, using a number of different methods including conjoint analysis

and hedonic price estimation. This includes details of any other work published

on the use of these techniques in hotel and tourism markets. The methods

selected for this study are justified, and there is then the development of a formal

hedonic price model for fixed characteristics.

Chapter 6 describes fully the steps taken to test empirically the model developed

in the previous chapter. It sets forth the three-stage sequence of methods used to

determine product-differentiating characteristics, characterise their utility, and

estimate implicit hedonic prices, with justifications for the sequencing of these

methods.

Chapter 7 describes statistical testing undertaken, and provides the results and

analysis of the empirical study together with the inferences drawn. It

demonstrates that the fixed locational (and other) characteristics of place-

sensitive products do possess market valuations that can be used to predict

expected product prices, and that ‘underpricing’ or ‘overpricing’ by individual

firms are associated with variations in demand from market expectations.

Chapter 8 provides a summary and draws conclusions. It surveys the

implications of the study for policy and for the suppliers of place-sensitive

products, and indicates a number of directions for future research in the area.

1.6 Study limitations

This study is specifically concerned with short-run positions in a market place

where the number of suppliers is given. Whilst implications for new firms

entering the market are given in chapter 8, long-run market entry and exit are not

investigated. Similarly, the data gathered for the case study are mainly cross-

sectional, so there is no consideration of firms’ intertemporal reactions to

changing market or competitive conditions. No published time series data exists

that is suitable for analysis, and therefore all data for all stages of the empirical


investigation had to be collected by fieldwork, and was limited by the goodwill of

Gold Coast hoteliers. Their help was generous and highly appreciated. Data for

this study was collected over a two-year time period from mid-1992 to mid-1994.

Integration of theories, paradigms and studies from more than one academic

discipline provides a strong catalyst and rich source of concepts for the research

detailed here, but also sets the other main limitation of the study. The heuristics,

focus and terminology of the disciplines vary somewhat, and this study has to

attempt to provide a balance between, for example, the greater econometric focus

that might be expected in a study based purely in economics and the focus on

rational strategy that would be more common in hospitality management

research. It is to be hoped that such a balance is achieved here.

The role of place sensitivity as a locational characteristic of products 11

Chapter 2. The role of place-sensitivity as a

locational characteristic of products

2.1 Introduction

The purpose of this chapter is to identify the nature of a product as a set of

characteristics. This set includes location characteristics for those products which

are place-sensitive in demand. It is shown that the majority of place-sensitive

products are services rather than goods, and some of the fundamental differences

between goods and services are noted.

The chapter also identifies the components of location relevant to place

sensitivity, distinguishing between those components which directly contribute to

the increased utility of consuming a product at a specific location and the ‘access’

or ‘distance’ component which alters utility indirectly through its impact on

transport and other transactions costs for consumers and producers. The

relationship between this form of analysis and other major themes in location

theory is explored.

Finally, it is shown how tourism products at specific locations, particularly hotel

accommodation, constitute place-sensitive products within the context of a single

destination or urban area.

2.2 Products

2.2.1. Product definition

The conventional view in economics that a product is a scarce good or service,

and represents an output resulting from a production process, provides a starting

definition. However, such a definition does not provide an adequate description

of what constitutes a product from a consumer needs perspective, nor an adequate

specification of the boundaries of a commodity class. Watson (1977) suggests

that any product can consist of a broad or narrow class of objects, as well as some


unique object. For example, ‘soft drinks’ are a broad class of objects, ‘cola

drinks’ a narrow class, and Coca Cola is a unique object. In perfect competition,

perfect homogeneity amongst a number of products automatically defines a

commodity class, a market and an industry. In other cases, the boundaries of a

commodity class may be defined in theory by reference to the degree of

substitutability between objects, but the less substitutable products are, the

fuzzier the commodity class boundaries become. In practice, definition of what

constitutes a commodity class has become a problem for antitrust law (Hawk

1990; Watson 1977). Hawk notes, for example, difficulties in two cases in the

United States (Berkey Photo v Eastman Kodak 1979 and Jefferson Parish

Hospital v Hyde 1984) where definition of the relevant market was a problem.

Where two or more products are not perfectly homogeneous, then the degree of

substitutability determines whether or not they are part of the same commodity

class. One general measure of the degree of substitutability for any given product

against a set of others is the level of monopolistic market power held by its

producer. This power results in the producer’s ability to sell continuously-varying

amounts of output in response to charging different prices (Varian 1992) where

there are no producers of identical or almost identical products. This measure of

substitutability takes a general view of a product, in terms of its aggregate or

overall difference from the general nature of other products. It does not

differentiate products either by the possession of specific characteristics nor by

the degree or quality of any specific characteristic. For example, a hotel and a

holiday apartment may be regarded as different products, but are general

substitutes for each other as tourist accommodation.

2.2.2. Product differentiation

An alternative measure of the level of substitutability between products examines

the specific reasons why products may differ, assuming for the present the

existence of a generic commodity class. (This assumption holds that all products

within a class perform fundamentally the same role in providing consumer

utility.) Earlier models of monopolistic competition and product differentiation,

based on Chamberlin (1933), hold that products can simply differ, in reality or in


consumers’ perceptions. Strategists in management theory highlight quality -

whether real or perceived - as the major differentiator (Porter 1985; Shapiro

1983). These differentiators are still highly general in nature. They attempt to

encapsulate all product differences within a single variable which may serve to

explain variations in product prices and the level of monopolistic power enjoyed

by each producer.

Further attempts to categorise differentiators between products have produced

theories based on more specific factors. Tirole (1988), for example, distinguishes

between vertical differentiation, such as product quality (where all consumers

agree over the preferred levels or rankings of products and characteristics), and

horizontal or spatial differentiation, where products differ in types of feature

offered (and the optimal choice varies between consumers according to different

tastes). Another typical classification (Samuelson et al. 1992), divides

differentiators into the following categories:

• location

• quality - both actual and perceived

• brands or trademarks

• styling and design

• consumer beliefs.

This type of classification permits multivariate analysis of the effect that each

category (or factor) may have on the individuality of each product and its demand

and/or price relative to those of competitors. The methodological issues

associated with such multivariate analysis will be examined in chapter 5. It is

quite possible for two products to possess identical (perfectly homogeneous)

styling and actual quality, but differ through (imperfectly competitive) brands and

locations. Each producer holds a monopoly on the provision of their specific

brand or particular location.

Products which are regarded as different can then be seen as combinations of

basic (primitive) goods or characteristics (Gowland & Paterson 1993).

Consumers make a purchasing decision as if they are buying one composite good


including a set of primitive goods i (i = 1, 2,... n), rather than another including a

different set j (j = 1, 2,... m). Preferences between primitive goods determine

consumer choice, but primitive goods cannot be acquired separately. The

implication of this model is that if producers set price equal to marginal cost for

each primitive good, then the difference in overall price between composite

goods i and j should equal the amount that consumers would pay for primitive

goods featured in one set but not the other, if those primitive goods were sold

separately. The ‘price’ of each primitive good equals its marginal cost of

production.

2.2.3. Characteristics theory

A more formal behavioural account of consumer choice for products of this

composite or differentiated nature is provided by characteristics theory (Lancaster

1966; Lancaster 1971; Lancaster 1979). Characteristics theory postulates that

consumers derive utility or benefit from features or characteristics which

products may possess, rather than from the products themselves. Therefore

consumers demand particular characteristics in certain quantities, and often with

particular levels of quality. For example, a consumer buying a restaurant meal is

likely to derive utility from such things as the type of food, style of service,

quality of physical surroundings and release from clearing up afterwards

(Lancaster 1971).

Characteristics theory specifies that a product will possess a certain set of

characteristics, which by its fixity determines the nature of that product. This

relationship between product and characteristics has been termed consumption

technology (Lancaster 1966). Only products with identical consumption

technology, offering an identical set of characteristics, would be regarded as

homogeneous in the perfectly competitive sense. The consumption technology

notion is similar to the one above, of a product being a composite of primitive

goods. Demand for a product is then a derived demand, as consumers will then

derive the highest utility from the product which offers the optimum

combination of characteristics; this will be examined more closely in chapter 4.


Two problems occur with characteristics theory. The first is that of identifying

which characteristics are important to consumers, and given that no one product

may possess a consumer’s perfect combination of characteristics, how does the

consumer make the necessary trade-offs to reach an optimal choice? This

problem has been considered by researchers in consumer behaviour, and will also

be examined in chapter 4.

The second problem is the measurement of qualitative and subjective

characteristics. The original formulation of characteristics theory takes all

characteristics to be quantifiable (Lancaster 1979). However, many product

characteristics are qualitative, or are important in consumers’ perceptions rather

than in fact (Bowbrick 1992). In some cases a characteristic differentiates

products vertically (that is, the characteristic is a synonym for quality

differences). In this case the lack of a quantitative measure is less important,

since preferences can be ranked ordinally to form a scale for the characteristic.

For example, a fashion-branded product may be preferred to an ‘ordinary’ brand,

which in turn is preferred to a generic brand and then an unbranded product.

However, qualitative characteristics causing horizontal differentiation cannot

even be scaled ordinally. Research has therefore concentrated on comparing the

utility to a consumer of various bundles of characteristics offered by different

products (Green & Srinivasan 1990; Green & Wind 1975). In the current study, it

is shown in chapter 4 that the locational characteristics of place-sensitive

products are largely vertically-differentiating characteristics possessing an

interval, or at least ordinal, scale.

2.2.4. Services as distinct from goods

Characteristics theory was developed principally to aid analysis of the demand

for differentiable goods. However, it is possibly even more useful in the analysis

of the demand for services, where direct comparability of two service products is

more difficult than that of goods which possess obvious tangible features. A

service can really only be described in terms of the characteristics which provide

benefits, or utility, for consumers.


There are a number of approaches to distinguish services from goods, in relation

to their economic relevance. One approach (Shostack 1977) suggests that the

main difference is the package of characteristics or tangible clues, such that the

service (or good) itself is unimportant. Production (or process engineering)

methods may intrinsically be the same in that both goods and services require

factor inputs of land, labour, capital and enterprise, and the management of a

production process to provide a saleable output (Shostack 1982).

Other approaches take the view that the differences, in economic terms, between

goods and services are more concrete. Some major differences are that:

• services are not storable, and unused capacity is wasted

• service quality is difficult to measure and difficult to control

• service technology and delivery is more flexible

(Holmstrom 1985; Lovelock 1992a)

These are in addition to a service being seen as an intangible deed rather than a

tangible object (Berry 1980), personal involvement of suppliers and consumers in

production, and the delivery of many services in real time (Lovelock 1992a).

In terms of the specific characteristics that are important as differentiators

between service products, Sasser et al. (1978) argue that the main characteristics

are facilitating goods, explicit intangibles and implicit intangibles. For example,

in a hotel the facilitating goods are the rooms, beds and other furnishings, the

explicit intangible is sleep, and the implicit intangibles may be such things as

room service quality and style of decor. The explicit intangible is likely to vary in

quality between products, whereas the facilitating goods and implicit intangibles

can be both horizontally and vertically differentiated. This typology is somewhat

similar to that of Levitt (1981), who takes services to consist of a tangible

product (for example, the hotel room), a core product (sleep), and an augmented

product (the addition of all the intangible features to the tangible product). The

model of tangible, core and augmented product has become a standard basis for

work by a number of writers in services marketing (Smith 1994).


Differences between the characteristics of goods and those of services are further

highlighted by research into service types and what constitutes service quality.

Level of customisation, personalisation and operational style are cited as

classifiers and differentiators (Lovelock 1983). Service quality is divided into

tangibles, reliability, responsiveness, assurance and empathy through the

SERVQUAL service quality measurement instrument (Parasuraman et al. 1988).

However, doubt has been raised as to whether quality, as a high-level

abstraction, can be divided into functional or intrinsic characteristics as required

by this instrument (Zeithaml 1988). There is currently ongoing research (for

example, Buttle (1996), Zeithaml et al. (1993)) to determine the extent to which

the individual elements of quality in service can be measured as functional

characteristics.

Another useful categorisation involves distinguishing between provider-driven

services, based mostly on labour inputs to their production, and facility-driven

services (Turley & Fugate 1992), which have higher capital inputs. For example,

legal services and hairdressing are mostly provider-driven, whereas

telecommunications and transport are mostly facility-driven services. The latter

are becoming more common in most economies as tertiary sectors develop and

become industrialised. Facility-driven services are seen as having five main

dimensions (characteristics):

• operational: in terms of space, buildings, equipment and other tangible

items

• locational: the quality of a location and its convenience to consumers

• atmosphere: service image and ambience

• consumer use: the degree of user-friendliness, or user adaptation, required

• contact personnel: the degree of consumer contact with providers.

After Turley & Fugate (1992)


These intangible elements can therefore clearly be seen as characteristics to

differentiate between service products as strongly as tangible characteristics such

as colour, size, weight and shape do for goods.

2.3 Place-sensitive products

2.3.1. The nature of place-sensitivity

Place sensitivity relates specifically to consumer products in final demand, where

the purchaser ‘acquires’ some aspect of the place as part of the product bought. A

full definition of place-sensitive products was provided in section 1.2, but a brief

recapitulation is given here:

Place-sensitive products are those which are:

• produced

• traded

• consumed

at the same physical location, and whose individual location is an integral

characteristic of each product.

If the spatial location at which any product x is consumed is likely to influence

the demand for that product, then there is de facto product differentiation

between product x and any other product. No two locations can be absolutely

identical. It is therefore important to examine what constitutes place-sensitivity of

commodities in general, and to examine the specific roles that a location plays in

determining the individuality of each product within a commodity class.

Place-sensitive products for final consumers are usually services, or

goods/service combinations, rather than pure goods (Turley & Fugate 1992), or

are likely to involve a built fixture such as a house or recreational amenity.

Services may be location-dependent where the facilitating good on which they

are based (Sasser et al. 1978, op.cit.), which is really the production plant for the

service, has a fixed location. The location chosen is then both:


• a characteristic of the product in demand, and

• a factor influencing costs of production, through land and building costs,

transport costs, and other resource costs linked to that location.

In addition there is the consideration of the level of competition found within any

geographical area related to the specific location. The issues of costs and

competition will be briefly examined in section 2.4.

2.3.2. The components of the location of place-sensitive products

Location is not in itself a single nebulous characteristic of a product, but has a

number of components or roles, which may in themselves be sub-characteristics.

Research has identified three main roles which any specific location plays:

• access to or distance from particular places

• intrinsic site characteristics

• neighbourhood characteristics

(a) Access to or distance from particular places

Both producers and consumers are concerned with distance, travel or transport

costs, and accessibility. As will be seen in section 2.4, producer location theory is

mostly concerned with the transport costs of raw materials from their source to

the production point, and of finished goods from the production point to market

places. A producer’s objective, other things being equal, will be to minimise total

production and distribution costs. Likewise, consumers may be concerned with

minimising the time and cost of reaching a fixed-location service from wherever

they happen to be. For a commodity such as housing, this may mean that access

to places of work or a CBD are important (Coulson 1991; Dubin 1992; Muth

1969; Straszheim 1987), or access to amenities such as shops and parks (Phipps

1987).

Other commodities are spatially complementary, in the sense that consumers visit

a specific location to acquire product i, and if product j is complementary in


demand, then the access distance from i to j is an important characteristic for

product j. For example, it has been demonstrated (Mitchell & Lovingood 1976;

Vickerman 1975) that for visitors to city centres there is often a strong

complementarity between shopping and recreation, so that recreational services

are valued more if they are sited close to shopping centres. The same relationship

is found in reverse (Moutinho & Paton 1991) where a shop may be more highly

valued when situated near an existing recreational amenity.

(b) Site characteristics

As an aspect of location, site characteristics are those which are physically

intrinsic to distinguish a product’s siting. For example, angling permits in the

United Kingdom differ in relation to the water quality, number and type of fish to

be found in different stretches of water; a block of land may differ in soil quality,

aspect, slope and flora from others (Blomquist 1988); rooms in a high-rise

building may offer different qualities of view at different levels. Site

characteristics may be both quantitative and qualitative (Englin & Mendelsohn

1991), and can encompass simple elements such as the degree of isolation from

other people or activities (Joseph et al. 1989).

(c) Neighbourhood characteristics

Neighbourhood characteristics have been defined as those elements which are

exogenous to the specific site of a product, but endogenous to the surrounding

area and likely to influence utility gained from the product (Werczberger &

Berechman 1988). They have been investigated particularly with reference to

housing, and include such elements as air quality, land use on adjoining blocks,

local socio-demographics and landform (Can 1990; Dubin 1992; Garrod & Willis

1992). Once again, these characteristics may be quantitative or qualitative, and

much of the published work in the area is concerned with estimating and valuing

the differentials which variations in neighbourhood characteristics cause between

otherwise similar products. For example, Dubin (1992) estimates an aggregate

neighbourhood-characteristics variable by examining residual variations in house

prices after accounting for accessibility and physical house quality; Garrod &

Willis (1992) show that broad-leaved woodland is a more valuable


neighbourhood characteristic to house prices than neighbouring sitka spruce

plantations.

Location may be divided into the above three component characteristics, or may

be treated as a single characteristic whose value is a function of what have been

termed exogenous factors (access), endogenous site factors and endogenous

neighbourhood factors (Englin & Mendelsohn 1991; Werczberger & Berechman

1988). In general, in this study the former treatment is used, in order to provide

separate examination and evaluation of each of the relevant components of

location. The importance of separating out the individual contribution of each

location component has been noted in the literature (Can 1990; Freeman 1979).

Both Can and Freeman note that the importance of endogenous site factors, for

example, is different in different neighbourhoods, so that a model which

combines location components into a single characteristic fails to predict

accurately the specific contributions of individual effects.

2.4 Location in economic theory

Microeconomic interest in locational variables generally focusses on three main

areas:

• the location of a single firm in a free market, with respect to resource inputs

and the market place for its products; a special case of this is the location of a

household as a productive unit,

• spatial equilibrium models of competition where two or more firms compete

across a single physical marketplace, and

• location as a characteristic of a product in demand.

Although this thesis primarily examines the latter of the above three areas, it is

also useful to consider findings in the first two areas. A brief examination of

these is necessary due to the specific nature of markets such as those for


hospitality and tourism products, where the producer and the consumable product

are intrinsically to be found at the same location.

This section will briefly summarise some of the major location theories in the

above three areas, and demonstrate where they bear relation to the current study.

2.4.1. The location of industry

(a) The location decision for a single firm

Classical location theory hypothesises that a firm will locate, cet. par., at a point

where total transport costs are minimised (Alonso 1964). This implies the

incorporation into the firm's production function of:

• transport costs of inputs, where those inputs are likely to be location-specific

resources such as coal or mineral ores; and

• transport costs of outputs to one or more market places in which competition

of some kind will not permit these costs to be added as a price premium.

Basic theory in this area dates back to the work of Weber (1928), Hoover (1948),

Isard (1956) and Greenhut (1963). The theory generally assumes constant

demand in market places, no external economies, and homogeneous products,

although more sophisticated versions of the theory attempt to relax each of these

assumptions.

It is possible also to build in the quality of an input to a firm's production

function in a specific location. Ricardo, for example, examined in various

writings the quality of land for particular types of agricultural production at

different locations (for example (Ricardo 1817)); the quality of mineral or forest

resources may vary, to allow a producer to substitute an inferior, but less distant,

resource for a superior but more distant one. This principle of location

substitutability may apply in tourism (Miossec 1977), given a spatially

homogeneous market, but applies to producers only as facilitators of derived

demand by consumers.


Further elements of the theory of an individual firm's location relate to the

production function of that firm in a general marketplace where consumers are

spatially distributed over a wide area and the transport cost of the final product is

high, as for example with carbonated soft drinks. Once again, producers seek to

minimise aggregate transport costs for a given spatial market coverage, as

demonstrated by Von Thünen (1826). In the case of tourism products, the

transport cost falls upon the consumer rather than the producer, but for maximum

overall market efficiency the resulting producer location will be the same

(Vickerman 1975). The incidence of transport costs, whether on the producer or

the consumer, may be considered as part of the general case of what has been

termed “Weberian location” equilibrium (Bailly et al. 1992), where an optimum

location minimises the sum of all transport costs, for inputs, final products and

consumer travel to the point of sale.

The choice of location for a household as a productive unit may be seen as a

special case of classical location theory. The output produced is labour, and many

inputs are likely to be items purchased from shops and other retail outlets, so that

travel cost minimisation for a household will mean, cet. par., selecting a location

close to the place of work, retail outlets and public facilities such as schools,

hospitals and parks (Alonso 1964; Muth 1969). Further implications of

household location decisions are examined below in section 2.4.2.

Classical location theory however assumes that all locations are homogeneous

with respect to site and neighbourhood characteristics; that is, that location points

are selected on a featureless plain, so that access, distance and transport costs are

the only differentiators. These models cannot therefore fully explain situations

where location itself is a characteristic of a product in demand.

(b) Location decisions for firms in spatial competition

Basic location theory relating to an equilibrium set of locations for competing

producers dates from the work of Hotelling (1929). Classical or least-cost

location theory examines individual producer decisions, assuming perfect


competition with homogeneous products, but the work of Hotelling introduces

spatial monopolistic competition, where one producer can expand market share at

the expense of another by locating at a point in the market place which gives a

cost advantage on product delivery, and hence a lower overall product price. If

each producer can anticipate others’ moves, and can respond, then spatial

competition theory predicts that there will be a stable equilibrium set of locations

for production. Hotelling’s original work considered competition and location for

a duopoly; later work extended the findings to markets with free entry and many

producers (for example, Perloff & Salop (1985), Salop (1979)).

Competitive choice of locations automatically removes perfect contestability

from markets, since the acquisition of a 'perfect production location' by firm A

would inherently force market entrant B to go to a second-best location. The

spatial monopolistic competition model relates not just to geographical location

but to any single characteristic differentiating what are otherwise homogeneous

products. The theory rests on consumer indifference between products for all

other characteristics save the spatial differentiator (Tirole 1988). Later research

has shown, however, that these conditions for equilibrium are unlikely to be met,

as locational differentiation is more likely to be one of a number of

differentiating characteristics, and an important component of imperfect

competition (D’Aspremont et al. 1979). However, research in the area has not

generally included the specific components of location as characteristics, and has

assumed that other product differentiators are not related to location.

(c) The location of services and retail outlets

A further strand of study in location economics relates to services rather than to

goods. In particular it is concerned with the location of retail outlets and those

consumer services which are supplied directly to households. This work dates

back to the seminal paradigms of Christaller (1933) and Lösch (1940). It relates

to a market orientation where producers (service providers or retailers) maximise

profits mostly through locating at points which maximise the number of

households that will find it less costly to travel to their outlet than to that of any

competitor, so will buy from them if the households are rational cost minimisers.


(A similar model applies in the case of providing public services, where the aim

is increased social welfare by locating services at points which serve the optimum

number of households with the lowest aggregate household travel costs.)

Increased profits (from greater revenue) or welfare from such a geographical

market position are likely to be more important than the effect of transport costs

in delivering supplies to the retailer. It is assumed at the start that there is free

entry to and exit from markets, and that households exist with a constant density

across a homogeneous geographical space, although more refined versions of the

theory relax these assumptions.

For retail outlets, the size of the market area in which each retailer operates

clearly depends on the number of items sold and size of mark-up to maintain

profitability, which in turn depends on frequency of purchase. A retailer of

groceries, for example, may gain enough trade to stay in business supplying a

small area of only a few hundred households, whereas an art gallery may require

a large area of several thousand households. Thus there develops a hierarchy of

levels to trade different products. In addition, consumers seek savings in

transactions costs by jointly shopping for several products at one location and

bundling their purchases (Stahl 1987). Joint locations for suppliers thus confer

“demand externalities” on each other. If retailers and other service providers

experience localisation economies, that is, economies of agglomeration through

locating close to other suppliers, in shopping centres for example, then central

places emerge in a hierarchy of trading locations (Lösch 1940). The original

homogeneous space then becomes differentiated by the emergence of these

central places (Bailly et al. 1992).

Research in this area is of limited value in assessing place-sensitive products,

since few retail services themselves possess location characteristics which are

likely to influence demand, except where the retailers trade as complements to

other services, such as a pharmacy trading in a medical centre or a takeaway

foods outlet trading at a recreational site.


2.4.2. Urban location

Research in urban location encompasses many strands. At the heart is the notion

of agglomeration economics and the interdependence of the locations of

economic activities. A second strand of study examines the aggregate spatial

structure and shape of cities (Alonso 1964; Mills 1967; Muth 1969), from

monocentric models to linear, multicentric and zoned models. A third major

strand is concerned with individual location decisions within metropolitan areas;

this strand is the most relevant to the consideration of place-sensitive products.

Individual location analysis may examine:

• residential housing choice, where the location of employment, offices and

services is a fixed parameter

• business location, where residential patterns are a fixed parameter (as may be

transport, and the location of competitors and other businesses).

For both of the above, an optimal location includes, cet. par., the minimisation of

total transport and transactions costs as part of economic activity. In addition for

businesses, market areas and localisation economies may be important, as

outlined in section 2.4.1. above. A location is selected for its utility as an input

into a firm’s production process.

For households, however, site and neighbourhood characteristics may play a

more important intrinsic role in location choice. If households are assumed to be

rational decision makers, the ‘consumption’ of a location means consuming the

amenities, or site and neighbourhood characteristics, offered by that location

(Bartik 1987). These characteristics may include such things as air quality, noise,

views, land steepness, charm of a historic location, local social and ethnic mix,

physical housing quality and crime levels. The characteristics may provide a

positive or negative effect on the utility of a site, and when combined with the

disutility of transport and transactions costs for consumers to reach places of

employment, retail outlets, services and recreation, they may be expected to

influence the price of a house or piece of land of an otherwise standard type. A

fuller summary of these location characteristics and their influence on prices and

demand will be given in chapter 4.


2.4.3. Urban location and the tourism industry

The location of tourism industry producers within destinations, especially urban

destinations, is of particular interest because the location characteristics must

satisfy the needs of both the producer and the consumer at the same site. Most

tourism activity requires a base of an existing resource as a core product (Pearce

1989; Smith 1994). The core product may be one or more natural attractions,

historic or cultural monuments, or an existing trading or population centre. These

core products may be public goods, such as beaches, many monuments or the

ambience of a particular lifestyle, or they may be marketable and tradeable

products, even where there may be no marginal cost of increasing supply but

suppliers maintain exclusivity by charging economic rent (Bull 1991); in either

case, if the core product is the main reason for the tourist’s journey to the

destination, the specific location of that product becomes a fixture in further

consideration of characteristics and place-sensitivity.

Many urban areas have been found to possess a core tourist zone (Ashworth &

Tunbridge 1994) or tourist business district (Smith 1983; Stansfield & Rickert

1970). This zone contains the bulk of attractions to visitors and thus offers the

localisation economies of a central place in tourism markets. Clearly, any

supplier of a tourism product located within this zone has a market advantage in

terms of access to the bulk of consumers (tourists), closeness to suppliers of

complementary products, and positive neighbourhood characteristics in the

physical nature of the surrounding area which attracts tourists in the first place.

Stansfield & Rickert (1970) suggest in particular that entertainment and

recreation suppliers experience strong localisation economies in cities through

complementarity and low tourist transactions costs. The core tourist zone may or

may not overlap with a city’s central business district; if the primary economic

focus of the city is tourism, as in a resort or heritage city, then the business and

tourist zones may be the same.

Some theoretical studies have then suggested that the concepts of central place or

centre-periphery theory will apply to urban tourism product locations (Mitchell &


Lovingood 1976; Vickerman 1975; Yokeno 1968). Locations in concentric rings

around the central tourist zone are progressively less attractive as tourist travel

costs to reach them increase, and site and neighbourhood characteristics possibly

become less attractive.

Empirical work in this area has found however that the important location

characteristics for tourism businesses include factors other than distance from a

central tourist zone, since:

• many tourism businesses supply joint markets: tourists and local consumers,

who have different points of departure in setting out to make a purchase

• tourists, especially first-time visitors are likely to have imperfect market

knowledge, so that a highly visible location, even if less ‘central’, may offer

advantages

• access to other services for tourists is important, particularly access to

transport such as airports or major highways.

Since the empirical work in this area concentrates on the effects of location

characteristics on tourist demand, this will be examined in chapter 4.

2.5 Hotel accommodation as a place-sensitive product

Hotel accommodation as a product, and as part of a total tourism product, has

been investigated in economic, tourism and marketing literature. In the context of

previous discussion, it is important here to identify what a hotel product

comprises.

As a complex product, hotel accommodation includes a bundle of services and

some tangible goods. Lewis (1981) echoes Levitt (1981) in suggesting that there

are three main elements of this complex product: a tangible presentation, a core

‘product-service’ and an augmented product. Lewis outlines this categorisation of

elements, with examples, as follows:


• the tangible presentation: rooms, public areas, furnishings and staff

• the core ‘product-service’: lodging at a particular time and place

• the augmented product: ‘communication’ involving guest services.

Lewis (1984b) and Lewis (1985) note that hotel products may possess so many

separate elements that consumers may only distinguish a few, such as a

comfortable bed at a convenient location, as the basis of the product. Hartman

(1989) uses a more concrete definition of product elements, citing the guest

room, availability of facilities such as food and beverages, parking and

recreational amenities, and service convenience including reservations, check-in

and room service. Some of the characteristics involved, such as room size, are

fixed once a hotel is constructed, whereas others such as the style of food and

beverages offered are variable characteristics. Producers are therefore able to

alter some style (horizontally-differentiating) characteristics as well as some

quality (vertically-differentiating) ones in the short run. This provides a useful

categorisation of product-differentiating characteristics with some examples:

Variable characteristics Fixed characteristics

Horizontal difference Colour schemes Access to points x1 x2 etc

Vertical difference Service quality Distance to point xi

The definitions of fixed and variable characteristics are as set out in section 1.2.

Clearly, hotel accommodation includes a variable set of personal services, a

variable set of facilities (both goods and services) complementing lodging, and

(temporary) lodging itself. Since the service of lodging means the supply of a

temporary home, the product should therefore exhibit some of the same

characteristics and benefits as housing. In particular the access, site and

neighbourhood characteristics which are important to households when selecting

a house, such as quiet and attractive surroundings and good views might be


expected to play some part in the hotel accommodation product. Access in the

latter context means distance from tourism activities, both business tourism and

recreational tourism ones, rather than distance from everyday places of work,

retailing and other everyday services.

The importance of these product characteristics has been confirmed in research.

Arbel & Pizam (1977) find in a study of hotels in Tel Aviv that access to the

central business district is an important characteristic of hotel markets. In San

Francisco, it is found that the distance from Fisherman’s Wharf is highly

significant to the hotel product (Carvell & Herrin 1990). Wall et al. (1985)

produce a similar finding for distance from the central business district in

Toronto, with a secondary characteristic of quick access to the city airport. Other

studies confirm the joint importance of access to central business or tourist

districts and airports (Lewis & Nightingale 1991; McCleary & Weaver 1992;

McCleary et al. 1993), and that site characteristics such as quiet and a heritage

environment have a role in the product (Bjorklund & King 1982; Mayo 1974;

Overstreet 1993; Saleh & Ryan 1992).

If hotel accommodation is therefore a place-sensitive product, location will

provide differential advantages for suppliers. The relationship between these

differentiators and demand for each place-sensitive product will be explored

more fully in chapter 4.

2.6 Conclusion

This chapter has examined the nature of products as sets of characteristics from

both the point of view of the consumer and the supplier. The characteristics

approach is shown to be particularly useful in assessing the nature of services.

Place-sensitive products are shown to include location-specific characteristics

based on access to or distance from particular places, the nature of the site and

that of the neighbourhood; furthermore, place-sensitive products are mainly

services bound to production and delivery at a specific location.


A brief survey of the treatment of location in economic theory demonstrates the

relevance of each strand of study to the analysis of place-sensitive products.

Finally, the importance of locational characteristics to the tourism industry,

especially the hospitality sector, is shown. Location as a fixed product-

differentiating characteristic is likely to have an influence on the actions, and the

market structure, of suppliers of place-sensitive products. Chapter 3 addresses

these issues.

Market structure and costs 32

Chapter 3. Market structure and costs

3.1 Introduction

This chapter examines the nature of market structures for firms supplying place-

sensitive products as defined in Chapter 2. It will be shown that such products are

most likely to be supplied within a structure of differentiated oligopoly, and that

market signalling is frequently required to deal with asymmetric market

information.

It is argued that fixed locations bring about specific cost and supply conditions

involving maximum capacities and high proportions of fixed costs.

The chapter then examines the nature of market structures, costs and supply in

the hotel accommodation industry, as an example of an industry supplying a

place-sensitive product. It is argued that hotels operate in a Bertrand-type

oligopoly with relatively fixed supply.

3.2 Market structure with differentiated products

3.2.1. Market boundaries

With differentiated products, the notion of what constitutes an individual and

specific market may be problematical. As stated in the previous chapter, any two

or more products are usually considered to be of the same generic commodity

class if there is a reasonably high level of substitutability between them, which

may be measured by a positive cross-price elasticity of demand. However, there

is no clear definition of the degree of substitutability (or of a specific value of

cross-price elasticity) necessary to determine the cut-off point for products to be

classified as being within the same market. This lack of definition results in

considerable legal argument in antitrust law cases (Watson 1977).


The boundaries of a market may be ‘defined’ qualitatively by recognition

amongst producers, and amongst consumers, that the products traded are

performing essentially the same function, or possess some basic homogeneous

characteristics. This implies, for consumers, that there is some determination of

indifference between products based on these characteristics. In the long run this

may lead to an identifiable price nexus amongst products, although in the short

run the differentiating characteristics between products and the way they are

marketed may produce price and demand variations which suggest that products

are not really in the same market at all (Dilley 1992). Within any one market, the

level of homogeneous characteristics should be such as to create substitutability

on both the supply and demand sides (Carlton & Perloff 1990 :739). In supply

terms this implies that both the production function and the cohesiveness of the

market place constrain the pricing of products.

A market may be bounded within a geographic area (Watson 1977). As location

theory shows in terms of supply, production costs and methods may differ greatly

from one area to another. Alternatively, transport costs may be so high as to

constrain supply areas (Isard 1956). In terms of demand, transaction costs and

poorer consumer information about more spatially remote alternatives act as

constraints limiting demand to a specific geographical area. In addition,

governments may impose trading regulations which bound markets.

In the case of services, the property of non-storability often means that markets in

different locations are essentially separated (Holmstrom 1985), and that access to

those services determines the boundaries of each market. Markets for place-

sensitive products are geographically bounded in both supply and demand in

terms of basic locational characteristics, which are both an input to and a

component of the product.

3.2.2. Place-sensitive products and possible market structures

Once a market boundary is established, it is useful to examine which form or

forms of market structure may be appropriate to model the situation for place-

sensitive products.


The two ‘extreme’ forms of structure, perfect competition and monopoly, are

considered first.

(a) perfect competition

Four conditions are necessary for perfect competition to exist: a large number of

buyers and sellers, free entry to and exit from the industry, a homogeneous

product, and buyers and sellers in possession of perfect market information

(Browning & Browning 1992). For place-sensitive products, whose place

characteristics are both resources in production and a part of the final product, it

is important to distinguish between industry structure and market structure.

Whilst the industry could consist of many firms that may be considered as “a

grouping of firms which operate similar processes and could produce

technically identical products (or services)” (Wilson 1998: 812), the importance

of an individual and unique locational characteristic to the transaction decision in

the market place means that products cannot be homogeneous, and therefore

perfect competition is not possible as a model of market structure. In other

words, there may be many firms within the same industry, but each product is in

some way unique, so that the market - particularly within its geographic

boundary noted in 3.2.1 above - cannot be perfectly competitive.

In addition to product heterogeneity, most markets for place-sensitive products

are likely to operate in circumstances where market information is likely to be

imperfect. This will be discussed in section 3.2.5.

(b) monopoly

It is possible that a supplier of a place-sensitive product may be a monopoly, that

is, the sole producer of a product with no close substitutes. For example, a

unique tourist attraction such as the Eiffel Tower in Paris has no direct

substitutes. In this case, the set of locational characteristics may be the sole

defining evaluative criterion of the product. However, most place-sensitive

products as defined here consist of a set of characteristics, some of which are


unique (such as location), and some of which may not be unique. These products

will only be monopoly products if the unique characteristic is the major, and

perhaps sole, determinant of consumer choice (Lancaster 1971), and if the

market can only support a single producer. For example, a traveller in a remote

location who requires indoor accommodation may have no choice - there may be

only one motel available and access time to any other may not be possible. The

location may be so remote and aggregate demand so insufficient that no other

motel could enter business and make a profit.

Under these circumstances the geographic boundary of the ‘market’ is fixed by

Isard-type transport costs, but on the demand side (travel costs). The valuation of

the contribution that location or any other fixed characteristic makes to the place-

sensitive product is not possible since all the facets or characteristics of this

product are unique and inseparable in its particular market place. However, in all

but very remote or controlled locations, markets are likely to be contestable and

firms are able to supply products that in some respects are each unique but are

imperfect substitutes for each other. The empirical study set out in chapter 6

reflects this situation.

If the unique characteristic is not the only determinant of choice, then some

substitutability between products is possible, and the appropriate model of

market structure is some form of imperfect competition. This includes

monopolistic competition and oligopoly. The following sections examine the

nature of these structures and their relevance for place-sensitive products.

3.2.3. Monopolistic competition

If there is a positive, but not infinite, cross-price elasticity of demand between

products in a market place, then the structure of that market is one of

monopolistic competition or oligopoly. A monopolistically competitive market

has many firms, and no restriction on entry. Despite similarity in the basic

characteristics or performance of products, each firm sells a version of the

product which is differentiated from others, in terms of the characteristics

discussed in Chapter 2. Differentiation may be vertical, horizontal, or both. The


formal properties of a monopolistically competitive market are discussed by

Chamberlin (1933):

• each firm faces a downward-sloping demand curve

• each firm makes no long-run profit, since any profits earned in the short run

make the industry attractive to new entrants, causing a loss of market share

and a downward shift in the demand curve of each incumbent

• a price change for product i has only a limited effect on the demand for

product j.

A property of monopolistic competition which continues to receive attention is

the role of advertising in reinforcing, or even in creating, product differentiation.

Schmalensee (1986), for example, notes that advertising may on the one hand

provide information or market signalling about products, fostering competition

and encouraging vertical differentiation through the revelation of quality in the

advertising. On the other hand, advertising is perceived as creating artificial

differentiation through persuasive means, reducing competition and forming a

barrier to entry.

Full monopolistic competition implies contestability (Baumol et al. 1982) where

it is possible for any number of firms to operate sustainably. Free entry to and

exit from the market will allow the possibility of a large number of firms being

present. Barriers to entry into a market may include patents and legal restrictions,

contrived barriers such as heavy branding and advertising, economies of scale

which cause output at minimum average cost to be large relative to the size of the

market, and control of inputs which provide a cost advantage or non-replicable

product (Bain 1956).

In the case of place-sensitive products, specific location involves a sunk cost

which is incurred at the investment stage in developing production at that

location. This may constitute an entry deterrent to other firms. Since one firm

‘controls’ the locational input, it may be seen as a contrived barrier to entry

(Samuelson et al. 1992). Specific location is also an input which may produce a

non-replicable product characteristic, or at best may only be replicable at


considerable cost. (For example, a resort offering downhill skiing may have

prime snow and good slopes, which are replicable elsewhere by grading and

artificial snow-making machines, but its specific mountain view is not

replicable.) Therefore, it is likely that there will be few (geographical) locations

which will be good substitutes for each other in any market. Markets thus

become subdivided in the same way that any markets for highly-differentiated

products do, and where consumers, seeking to maximise individual utility, have

different preferred sets of product characteristics. Eaton & Lipsey (1989) describe

this effect:

“..the location of existing goods and products balkanizes the market into a

number of overlapping submarkets. As a result competition is localized - each

good only has a few neighboring goods with which it competes directly,

regardless of the number of goods serving the entire market.” (Eaton & Lipsey

1989 :750). This situation has been termed natural oligopoly (Eaton & Lipsey

1989 op.cit.).

3.2.4. Oligopoly with product differentiation

As a result of the arguments in 3.2.2. and 3.2.3. above, producers of place-

sensitive products are likely to operate within a structure of oligopoly. Few

producers compete within any specific market area. Under two conditions, the

spatial competition model of Hotelling (1929) for duopoly would apply. These

conditions are:

(a) if physical location is the only differentiator between products,

which are otherwise identical, and

(b) if the access component of physical location is the only

component of location which is different, so that site and neighbourhood

characteristics of products are identical.

As noted in section 2.4.1, condition (a) is very unlikely to apply (D’Aspremont et

al. 1979) to products in the type of market under consideration. In addition, since

place-sensitive products are likely to consist mainly of services, whose


characteristics can usually be varied and differentiated more readily than those of

goods, neither condition (a) nor condition (b) is likely to be true for these

products.

There are a number of models of oligopoly which allow for product

differentiation with regard to more than one characteristic. These include, for

example, that of the ‘chain market’ of Chamberlin (1933), which restricts the

cross-price effects on demand for the (differentiated) product of firm i to the

price changes of a limited number of other firms. Other models include those of

Friedman (1983), Grossman & Shapiro (1984), Perloff & Salop (1985) and

Shapiro (1989). A common feature of concern amongst these models of multiple-

differentiated oligopoly is whether firms generally operate under a Cournot-type

or Bertrand-type system. This question has significance for both the long-run and

short-run operation of markets for place-sensitive products. A discussion of some

relevant oligopoly theory is given in Appendix 1.

The conjectural variation model of oligopoly originally proposed by Cournot

(1838) is a single-period model in which prices are assumed to be unvarying, and

each firm then sets a profit-maximising output for itself whilst assuming that

other firms do not change their output levels. Market equilibrium occurs when,

holding the strategies of all other firms constant, no firm can obtain a higher

profit by selecting a different output. Such an equilibrium is termed a Nash

equilibrium, after Nash (1951). Cournot’s original model refers to static analysis

with homogeneous products, but the principle of selecting output levels as

decision variables can be, and has often been, applied to other situations. This is

notwithstanding the fact that the contradictions of conjectural variations models

mean that game-theoretic approaches are now almost universal instead; Cournot

is still important for modelling the existence of equilibrium and the choice of a

decision variable (Leonard 1994).

The critique of Cournot made by Bertrand (1883) argues that there needs to be a

more explicit mechanism to determine oligopolists’ prices. Bertrand’s own model

suggests that firms set prices, rather than output quantities, as a strategic variable.


It assumes that products are homogeneous and each firm sets a price, whilst other

firms continue to charge whatever prices they have already set. The model shows

that a Nash equilibrium in prices is attained when price equals marginal cost,

since (as in perfect competition) no firm can make any profit by reducing price

below marginal cost, and will lose its market share to its rivals if it seeks to raise

its price. Output, revenue and profit become a discontinuous function of price.

This situation, which is rarely found empirically (Carlton & Perloff 1990 :275), is

less of a problem for the Bertrand model if products are differentiated, since an

equilibrium may exist with differing prices, above marginal cost, to reflect

product heterogeneity (Shapiro 1989).

Since place-sensitive products are related to specific locations, the ‘supply’ of

that location as part of each product, and therefore the supply of the product

itself, is likely to have a capacity constraint. In rental housing, for example, there

can only be a limited number of units possessing a specific view at a location

with certain access characteristics. A recreational amenity may possess a

technical or authorised carrying capacity, which represents an output constraint.

Under this condition, any one firm selling at marginal cost may not be able to

satisfy all market demand, and hence other firms may be able to find buyers at

higher prices than the first firm. Edgeworth (1897) and (1925) shows that

capacity constraints on a Bertrand model can prevent a simple stable equilibrium

from being achieved, although a long-run equilibrium is possible in a large

market (Allen & Hellwig 1986).

With differentiated products and capacity constraints, it can be shown that the

Cournot and Bertrand-Edgeworth models produce similar solutions (Friedman

1983; Shapiro 1989), and that the choice of model to represent differentiated

oligopoly depends on how easily firms in an individual industry can vary either

output or price in practice. Shapiro suggests that the choice of model would

reflect the technology of production and exchange within an industry (Shapiro

1989 :351). With this in mind, at the development and entry stage of an industry

supplying place-sensitive products, decision making is likely to be Cournot-type,

representing competition to set output levels and install sunk productive capacity.


Once capacity exists, prices become the strategic variable, denoting Bertrand-

Edgeworth-type decision making. This two-stage approach is typical of sunk-cost

models (Schmalensee 1992). The concentration on price as a strategic variable is

enhanced since place-sensitive products are mostly services which are non-

storable and perishable, so that producers must adjust prices to influence demand

or be left with useless output (Carlton & Perloff 1990 :274). Further discussion

throughout this study will therefore largely reflect the Bertrand-Edgeworth

model.

3.2.5. Imperfect market information

A feature of place-sensitive products is that consumers must travel to the location

of the product in order to consume. It is therefore likely, particularly if the

consumer has to travel for some distance to reach the product, that the nature and

quality of the product cannot be determined by consumers by inspection prior to

purchase, and such products are therefore experience (or in some cases, credence)

products rather than search products (Engel et al. 1990; Gilbert 1991). That is to

say, experience products (such as tourism products) cannot be demonstrated to

consumers, and their nature is known to consumers only through some prior

experience or by description (Holloway & Plant 1988 :11). The physical

remoteness of many consumers from the product until the point of purchase may

result in imperfect market information on the demand side, whereas suppliers in

oligopoly are likely to have much better information about their competitors and

their products. Market information is likely to be asymmetric.

One of the most significant implications of asymmetric market information is

held to be market failure caused by the adverse selection of low-quality (known)

products in preference to those of (unknown) high quality (Akerlof 1970).

Akerlof also finds that since buyers may have a greater expectation that

experience products may be of low rather than high quality, there is downward

pressure on market prices, and quality.

Under these conditions, should the suppliers of differentiated products wish to

establish positive price differentials to represent the presence of particular


characteristics, they need to convey market signals (Spence 1974) to consumers.

Signalling involves an objective identification of quality and/or other

characteristics, and the communication of that information to consumers.

Suppliers of place-sensitive products are able to use their reputation as a market

signal only to repeat consumers; for operators of chains the signal of

standardisation can only apply to those product characteristics which are

replicable at every location, and clearly cannot apply to each location itself. Some

of the most important signals in this type of market are objectively-compiled

guides offering ratings and full product descriptions. Gitelson & Crompton

(1983) and Goodall (1991), for example, note the importance of government

information, ratings organisations and objective guide books in providing

consumer information to prospective purchasers of hotel accommodation,

recreational attractions and restaurant meals.

Objective ratings systems not only provide market signalling, but also help to

delimit the boundaries of markets themselves by specifying the quality and other

characteristics by which products may or may not be held to be substitutes. This

notion will be further explored in section 3.4.3.

3.3 Costs and supply of products at fixed locations

3.3.1 Costs at fixed locations

As noted in section 3.2.4 above, the decision to produce a place-sensitive product

involves a commitment to a fixed location as a differentiating characteristic. At

the entry stage, the selection of this characteristic is a decision variable for

production strategy (Shaked & Sutton 1983) on the basis of the anticipated

revenue which may be attributable to the location, in relation to the costs of that

location. Once a firm is in production at that location, however, the

differentiating characteristic becomes fixed, regardless of its value in the market

place.


The costs associated with production at a fixed location are generally:

• purchase of the site, or periodic leasing cost of the site

• cost of investment in buildings and other fixed plant at the site

• periodic site-related property taxes.

Over any short-run time period t, all three of the above costs are fixed, although

between any time periods t and t + 1, leasing costs and property taxes may

change. If a site has been purchased outright, its cost becomes a sunk cost

(Schmalensee 1992; Sutton 1991) since the cost cannot be recouped whilst the

firm continues in operation at the location. The same may be true with part or all

of the capital investment in buildings and other fixed plant. This is especially

likely if the design of buildings and fixed plant is related in some way to the

nature of the site and its location characteristics. For example, purpose-built ski

runs are matched to the terrain on which they are constructed; airport hotels may

be built to have easy access to terminals but rooms are oriented away from busy

sites and aircraft noise.

The marginal cost associated with the locational characteristics of an incremental

unit of output of a place-sensitive product is therefore zero in the short run. The

characteristics are fixed in cost and fixed in quantity per unit of output.

3.3.2. Supply at fixed locations

The ability to vary the level of output and supply of place-sensitive products

depends on the relative importance of the location as a factor input compared

with other inputs, and the extent to which the location (together with fixed

investment) acts as a capacity constraint.

Firstly, a location itself may impose a technical capacity limit on the output of a

product of which it is part. For example, the number of consumers who can be

physically accommodated on golf courses (as players) or in hotels is limited.

Location in this case may be regarded as a special case of a more general

situation where any one factor input may act as a capacity constraint on the


output of a service (Lovelock 1992b). Lovelock suggests that under these

conditions supply can be relatively elastic up to an optimum capacity level, or

‘comfortable level’, of operation. This is likely to correspond to a production

level where average cost is minimised. Above optimum capacity level there may

be a small range of output up to maximum full capacity, over which range supply

becomes inelastic. The extent of the range between optimum capacity and full

capacity depends on the ratio between the factor input costs of the location and

other inputs; if costs associated with the location are relatively high, then the

range is negligible.

A second possibility is that the location may be congestible, as in the case of

many tourist attractions (Healy 1994). Supply of the place-sensitive product may

be non-rival up to a level where intensity of use of the fixed location causes

congestion and a reduction in utility for each consumer. The point at which this

happens is an example of a location’s carrying capacity in demand. As a

constraint, the carrying capacity in demand is identifiable and operational in the

same ways as ecological, physical or social carrying capacities (Shelby &

Heberlein 1986). Although the notion of carrying capacity has been applied

principally to public goods, suppliers of any place-sensitive products are likely to

be aware, from consumer feedback, of their optimal carrying capacity in demand.

3.4 Market structure of the hotel industry

The hotel industry provides an excellent example of a market with differentiated,

place-sensitive products with capacity constraints. There has been very little work

published on the market structure of hotels. Baum & Mudambi (1995) find that

the market in Bermuda exhibits the characteristics of a competitive oligopoly,

and this view is reinforced by Davies & Downward (1996) and Davies (1999) in

the UK. The latter notes that almost no other published work on the topic exists.

Hotels, motels and resorts frequently offer complementary products in the form

of accommodation, food, beverages, and often recreation, entertainment and

business services. With specific reference to accommodation, we have defined a


unit of the product as the service of renting a room over one night, or a

roomnight. Capacity for any one producer during time period t is therefore

limited at rt, where r is the number of rooms in the establishment. Each producer

i (i = 1, 2,... n) has a market-capacity share si where ( )

srt

rti

i

ii

n=

=∑ ( )

1

. The unit of

capacity is rooms rather than people accommodated. The assumption is therefore

made that rooms are homogeneous in terms of individual ‘capacity’; that is, that

rooms are let, for example, as twin rooms even if they are used by a single person

or the rooms have the technical ability to accommodate three or four people.

Suppliers may offer only one type of room, or in larger hotels may offer more

than one type at different prices. These may reflect, for example, different

physical quality, space or views. It is assumed here that producers are profit

maximisers overall and also for each type of product offered where they offer

more than one. Where hotels offer complementary products such as

accommodation, food, beverages and entertainment, it is assumed only that any

cross-subsidisation between accommodation and other products for the purposes

of aggregate profitability affects each type of accommodation offered equally.

This is a realistic assumption in the context of uniform accounting methods

employed in the industry (Coltman 1989).

3.4.1. A destination as a geographical supply area

In selecting hotel accommodation, consumers are clearly not indifferent between

products in totally different geographical areas. The extent of a geographical

tourist area or destination within which there is a high level of substitutability

between products is limited by consumers’ perceptions, image, and access (Smith

1989 :178-186). This determination of what constitutes a tourism market area is a

particular case of the general notion that markets involving a set of contact points

between buyers and sellers are often primarily geographically bounded (Watson

1977). Smith notes (Smith. op.cit. :163) that any distinct accommodation (or

tourism) market area is one which is perceived as internally homogeneous in


terms of tourism image. Places outside this area are perceived differently and so

constitute different accommodation markets.

Goodall (1991) and Stabler (1991) find that consumers of tourist accommodation

make a choice of product from within specific sets of choices. Goodall shows,

through the behavioural theory of opportunity sets, that consumers would

consider only accommodation of the same type, within the same area, and

offering the same general characteristics, as being members of a single decision

set (or market place) from which to make a purchase. Sets are held to be place-

specific. Stabler suggests that both consumers and producers operate within

limited opportunity sets, which form a hierarchy, although they do not necessarily

involve sequential choice. For a consumer, the type of holiday required may be at

the highest level of the hierarchy, followed by type of destination, what is

attainable, and then a specific set of choices of accommodation (as well as other

tourism products) within that smaller attainable set. Different consumer groups

have different attainable sets, by destination and by type of product. This

behavioural work reinforces the concept of a destination area as a boundary to

each hotel market.

Within a destination city or region, the number of accommodation suppliers is

likely to be related to the range and importance of tourist attractions for

recreational tourism, and the destination’s commercial importance for business

tourism. Clearly, a small destination offering some unique property such as a

production plant which business people from elsewhere come to visit may

possess only one or two hotels. A large destination city or homogeneous

destination region may have a number of hotels, although of different types.

Unless a destination consists of an entire, very small, country, however, the

literature cited suggests that direct competition is not nationwide (Slattery 1994).

3.4.2. Imperfect competition or oligopoly with outside goods

Any definition of a hotel market might allow for substitutability between hotels

and other products offering similar characteristics. This is analogous to the

situation of a differentiated market with outside goods (Salop 1979). (In Salop’s


model, outside goods are peripheral goods that are only partial substitutes for

those offered in the main market. They possess a few of the same characteristics,

but are generally thought of as being the products of a different industry.) Salop

demonstrates that a Nash equilibrium can exist for a small number of producers

of differentiated products, where they attempt to maximise differentiation

between their products in order to establish some type of local monopoly.

However, there may be a product which is seen as being produced by a different

industry. If this product happens to offer a combination of those particular

characteristics which contribute to a consumer’s utility (and can do so at a lower

price), this outside good may be preferred if it offers higher consumer’s surplus.

This may be relevant in the case of hotels. If important characteristics include

comfortable sleeping accommodation and a specific location, then serviced or

unserviced apartments may provide an outside product offering higher

consumer’s surplus to someone who would otherwise be a hotel accommodation

purchaser. Similarly, ‘resorts’ may be seen as outside products to the hotel

market, yet may offer a number of identical characteristics (Stanton & Aislabie

1992). The definitional distinction between hotels and resorts is also becoming

increasingly blurred.

This possibility of outside goods intervening in the market is noted here, although

for reasons of parsimony non-hotel products are not included in the empirical

analysis in chapters 6 and 7.

3.4.3. Grading

Since the majority of hotel accommodation is purchased by consumers who, de

facto, are purchasing and consuming at a distance from their homes, the only

consumers who are likely to have good knowledge of the product are repeat

purchasers. Others must rely on reputation, advertising or information provided

by third parties. Objective hotel grading or classification schemes were first

introduced in the 1890s by motoring organisations in Britain and Germany, and

in some countries later taken up by governments as official classifications. For

example, statutory classification of accommodation began in France in 1942.


Many governments’ and non-statutory classification systems follow the World

Tourism Organisation guidelines (United Nations 1963) to classify hotel

accommodation into five graded categories in conformity with locally appropriate

sets of standards, although this system is not used everywhere.

The effect of grading systems is to provide market signalling about the quality

and some characteristics of the products designated to be within each grade.

Standards are set for measurable horizontal and vertical characteristics such as

room floor areas, type of seating possessed, and hours of room service

availability. The hotel grading scheme of Australian Motoring Organisations is

shown in Appendix 2.

Although the objective of grading systems is to avoid asymmetric market

information and so help the efficient operation of markets (Callan 1994), a

further effect is to balkanise hotel accommodation markets by grade. Callan

shows that consumers treat a grade, or at most two grades, of hotel

accommodation as a separate product class and restrict their selection to products

within that class. Grading systems are therefore likely to contribute to the

development of separate oligopolistic markets for hotel accommodation.

3.4.4. The Gold Coast market for international hotel accommodation

The empirical work presented in chapters 6 and 7 uses data from a specific

market, defined as the Gold Coast market for international hotel accommodation.

The Gold Coast is the a priori region defined as such within the regional tourism

structure of the Queensland Department of Tourism. This includes the Gold

Coast City and Albert Shire areas. All suppliers in this market are located within

these areas, and the region is marketed as a single destination area by government

tourism marketing offices. The geographical area covered is shown in the map in

Appendix 5.

To justify the nomenclature of international hotel accommodation, licensed

hotels must offer a minimum standard level of characteristics (services and

facilities) which are graded with at least a ‘four star rating’ (see Appendix 2).


During the period 1992-94, the supply of international hotel accommodation on

the Gold Coast was in the hands of eleven hotels, each one an independent

producer. Collectively they offer 26 types of room product, excluding suites and

other multiple-room units. Room types in any one hotel may possess identical

access characteristics but different site and neighbourhood characteristics, for

example by offering different views. The hotels and room types are listed in

Appendix 3.

Throughout the period of this study, the capacities (numbers of rooms) of all

producers were stable. As is seen in Appendix 3, the market-capacity share si of

the largest producer is 15.8%, and the largest four producers collectively provide

46.7% of market capacity. These shares are clearly large enough for each

producer’s decision making to be able to have an effect on its competitors.

Although all room products possess the minimum graded standard level of

characteristics, they are differentiated both vertically and horizontally by such

characteristics as style, architecture, possession of other amenities, and of course

location. The main barriers to entry facing prospective competitors are:

• planning and zoning regulations

• the significant level of capital expenditure required to construct a new hotel of

viable scale

• absolute location advantages of existing producers, both in terms of input

costs and as a non-replicable product differentiating characteristic.

From the above, it can be concluded that the industry supplying international

hotel accommodation on the Gold Coast is oligopolistic in nature, operating with

fixed capacities, and producing multi-differentiated place-sensitive products.

This situation has scarcely changed in the period to 1998, with some changes in

hotel ownership but only one additional hotel constructed.


3.5 Costs and supply of hotel accommodation

3.5.1. Cost structures

The product designated ‘hotel accommodation’ is defined here as the service

generated by the use of a hotel room at a specific location. One unit of product is

one roomnight (the rental of one room for one night). Hotel accommodation is

serviced accommodation; that is to say, it is cleaned, provided with fresh linen

and disposables, telephone and other guest services. This serviced provision is in

comparison with outside products such as holiday units or unserviced apartments,

which may include none, or only some, of the above services (Powers 1988).

The cost structure of hotels, compared with that of motels, is often difficult to

determine since there are many joint costs between accommodation, food and

beverage outlets and other areas, and indirect costs may be allocated in different

ways (Coltman 1989). However, applying typical operating cost percentages

(Horwath International 1993) to Coltman’s sample model cost allocation gives a

cost breakdown for hotel accommodation as in Table 3.1.


Table 3.1 Breakdown of typical hotel accommodation costs (%)

Fixed Variable Semi-variablecosts costs costs

Direct wages 19.5

Indirect wages and salaries 19

Laundry, linen & guest supplies 12

Administration & fees 12

Energy 6

Depreciation 6

Property operation & maintenance 6

Marketing 6

Rent 4.5

Interest 4.5

Insurance & property tax 4.5

TOTAL 56.5 12 31.5

Source: Horwath International (1993) and Coltman (1989)

Table 3.1 demonstrates the preponderance of fixed costs (on an annual basis) in

the hotel industry. Semi-variable costs are those which cannot be related to the

supply of an individual unit of product, but which vary on a weekly or monthly

basis according to the overall level of output. It is suggested (Coltman 1989;

Kotas 1980) that semi-variable costs can be divided into ‘allocatable’ costs and

true fixed costs by comparing semi-variable costs between the month of highest

sales and that of lowest sales, dividing the difference by the difference in units

sold, and attributing the result as variable cost. (Powers 1988 :244) notes that the

fixed element of semi-variable costs is likely to be large because of the minimum

labour force, energy and maintenance requirements for a property to stay open.

Combined with high capital costs, this means that high total fixed costs dominate

hotel budgets.


3.5.2. Capacity constraints and business objectives

Hotels provide a good example of capacity constraints on supply. The maximum

number of rooms available at a fixed location is a physical constraint limiting

supply, as noted in 3.4 above to rt roomnights in time period t. This constraint

cannot be relaxed without the time-consuming construction of more rooms.

The situation, noted in section 3.3.2. above, of a difference between maximum

available capacity and optimum capacity is likely to apply in hotels. Firstly, it is

possible that when demand exceeds optimum capacity, it is possible that all

consumers at that time may receive an inferior service product (Lovelock 1992b)

because other inputs such as labour are fully stretched to cope. Secondly, hotel

managers frequently prefer to operate with some slack in terms of empty rooms,

in order to provide for last-minute emergencies such as unexpected VIP arrivals,

or re-accommodating guests if their current room becomes uninhabitable

(Lovelock 1992b).

The combination of high fixed costs and capacity constraints leads suppliers to

place strategic business emphasis on managing demand to match optimum

capacity as closely as possible. Hoteliers seek high occupancy rates (Lewis &

Chambers 1989) knowing that once all fixed and semi-variable costs are covered,

the marginal revenue from further units sold will almost certainly be closely

correlated with profit levels since marginal costs are very low. Low occupancy

rates would only be sustainable if demand were sufficiently inelastic that rooms

could be sold at a considerably higher price in order to cover inescapable fixed

costs. Owing to the oligopolistic nature of most hotel markets, this is an unlikely

case. Therefore, the supply of hotel accommodation is highly inelastic in the

short and medium term (Bull 1991 :84-85). At all reasonable market prices,

marginal revenue is likely to exceed marginal cost, and producers seek, cet. par.,

to maximise output.

Any major change in the short-run supply of hotel accommodation is likely to be

related to seasonal patterns of demand. Where, at low season, it is impossible for

hoteliers to stimulate demand for each hotel to reach an occupancy rate close to


optimum capacity, they may reduce supply by shutting down groups of rooms for

periodic maintenance or refurbishment (Lovelock 1992b). Thus, over a period of

a year, hotels may offer more than one level of supply. Since these levels are

programmed in advance, however, and they are fixed for specific periods of time,

the inherent short-run fixity of supply holds.

Hotels which offer complementary products of accommodation, food, beverages

and other services may develop business objectives which force products to be

interdependent. For example, entertainment may be deliberately supplied at a loss

in order to maximise revenue from beverage sales. However, this is unlikely to

affect producers’ emphasis on achieving high occupancy in accommodation

areas, since room sales form the largest revenue area for most hotels, as shown in

Table 3.2.

Table 3.2 Sources of hotel revenue in the USA and Australia (%)

United States Australia

Room sales 55 50

Food sales 20 27

Beverages 7 16

Other sales 18 7

Total 100 100

Source: Horwath International (1993)

3.5.3. Pricing

Suppliers of hotel accommodation set prices in a number of ways, mostly linked

to accounting costs. Standard hotel management literature includes the following:

• cost-plus pricing (identifying average total costs, then adding a fixed amount

or percentage)


• breakeven pricing

• contribution margin (pricing at ad hoc levels above variable cost)

• “$1 per $1000 rule-of-thumb” (relating room prices to capital construction or

replacement costs per room)

(Lewis & Chambers 1989; Rogers 1980; Shaw 1993).

There is little empirical work to test the prevalence and validity of each method.

Shaw (1993) notes that most of these methods assume inelastic demand over a

realistic price range. Producers follow a Bertrand model by assuming that

competitors will not respond to any price changes that they may make. In an

example of the Dutch hotel industry, Van Der Hoeven & Thurik (1987) find that

pricing by mark-up or contribution margin is rarely used, owing to the perceived

difficulty of calculating such prices for hotel accommodation.

Setting prices to take account of demand conditions has received little attention

in the literature. Rogers (1977) notes that prices are frequently used, by

consumers of experience products such as hotels, as mental cues to quality, but

provides no empirical examples of such practice by suppliers. This approach is

echoed by Shaw (1992) who expands on the work in consumer decision making

behaviour of Zeithaml (1988) to show that prices for hotels are linked to

consumers’ overall perceptions of hotels and their quality. Shaw does not,

however, demonstrate any link between prices and the specific characteristics

which any hotel may offer.

Whilst the above models apply to the setting of basic, published roomnight prices

or rack rates, hotels have moved since the mid-1980s to relate actual prices

charged more closely to market conditions. The procedure involved is yield

management (Badinelli & Olsen 1990; Hanks et al. 1992; Kimes 1989; Orkin

1988; Relihan 1989; Sheel 1994). Yield management takes account of the fact

that each roomnight is consumer-specific and non-resaleable, which therefore

allows for price discrimination between different nights and different consumers

(Hanks et al. 1992). The objective is to separate consumers into market segments

and make use of differing demand elasticities to maximise revenue from each


segment (Relihan 1989), whilst allocating portions of output between segments

in such a way as to maximise total revenue. Yield management procedures can be

formalised by a number of different models (Kimes 1989), but once again such

models do not attempt to link the prices which are set to any specific product

characteristics.

3.5.4. Fixed product differentiation

As has been shown in sections 3.5.1 and 3.5.2, hotel accommodation suppliers

are likely to offer relatively fixed supply, and emphasise demand management in

their strategy. This places a heavy reliance on marketing activity. Hoteliers use

aspects of the marketing mix, especially product design and promotion, to

reinforce consumer perceptions of differentiation (Bjorklund & King 1982;

Lewis & Chambers 1989). Most such marketing activity is concerned with

establishing and communicating variable differentiating characteristics such as

level of service, furnishing styles and ‘extra’ product attributes (Callan 1994;

Renaghan 1986) in order to contribute to an overall individualistic product image

(Lewis 1981). The interrelationship between this activity and demand will be

explored more fully in chapter 4.

Differentiating characteristics which are fixed upon entry to the market include

location, the siting and orientation of main buildings, and major structural

characteristics such as room sizes and architectural style. Models of pre-entry

decision making to set these characteristics include binary decision making

(Kimes 1987) and conjoint analysis (Wind et al. 1989). In addition there are

models which provide for compensatory characteristics for the products of

entrants into established markets where existing firms already offer some non-

replicable characteristic such as an optimum location (Drezner 1994; Stanton &

Aislabie 1992). However, entry and exit decision making are outside the scope of

the current analysis, which is concerned with short-run decisions in the market

place.


Once producers set their fixed differentiating characteristics, marketing strategy

involving these characteristics is limited to pricing and promotional activity. This

issue, in relation to hotels, will also be explored further in chapter 4.

3.6 Conclusion

This chapter has investigated the forms of market structure that may be

applicable to the supply of place-sensitive products, and has shown that the most

likely form is oligopoly with Bertrand-Edgeworth-type decision making. Direct

competition is likely to be geographically limited, and perhaps localised. Tourist

destinations are a good example of such a market, and accommodation suppliers

within these destinations provide a good example of local differentiated

oligopoly.

Since consumers must travel to the specific location for the act of consumption,

good market information and market signalling are important. The industry

supplying international-standard hotel accommodation clearly undertakes the

provision of information and signalling. However, pricing activity reflects costs

and general market conditions rather than product characteristics. This highlights

the practical need to investigate whether industry performance could be improved

by linking pricing to product-differentiating characteristics, and especially to the

level of fixed characteristics provided.

Demand for place-sensitive products 56

Chapter 4. Demand for place-sensitive products

4.1 Introduction

The purpose of this chapter is to outline the characteristics approach to demand

theory, with particular reference to the demand for place-sensitive products. This

involves the blending of approaches based in behavioural economics with those

based in consumer behaviour studies for marketing. The chapter examines the

nature of determinant characteristics in the consumption decision, and reviews

the literature on determinant locational characteristics of place-sensitive products.

There follows a summary of theoretical and empirical studies on choice processes

in tourism purchasing behaviour, which demonstrates that levels of choice

frequently form a hierarchy, with local accommodation choice made after the

selection of a primary destination. This reinforces the view outlined in chapter 2

that accommodation products are generally substitutable only within a bounded

geographical market. It is then shown that the locational characteristics of hotels

are frequently both determinant and vertically differentiating in relation to

consumer demand.

Finally, there is a discussion of the development of hotel accommodation on the

Gold Coast, with particular reference to the geographical siting of new entrants to

the market, the importance of various components of location, and the revealed

emphasis placed on location in suppliers’ promotional brochures.

4.2 Demand for the characteristics of products

4.2.1. Characteristics theory and demand

The theory of consumer demand makes the assumptions that consumers are

rational decision makers, and that in purchasing any product or bundle of

products they are attempting to maximise the utility (or satisfaction of needs) that

they can get from the products available (Engel et al. 1990).


The prime assertion of characteristics theory is that consumers do not derive

utility directly from the consumption of products themselves, but from the

characteristics provided by products (Lancaster 1966). Demand for products is

therefore derived from demand for characteristics and the ways in which products

possess or generate those characteristics. In aggregate, any consumer seeks to

maximise utility by acquiring that bundle of products which most closely

generates the set of characteristics which the consumer requires. In doing this,

utility maximisation is constrained by consumer budgets in relation to product

prices.

Formally, the model developed in (Lancaster 1966) and (Lancaster 1971) may be

written:

Maximise utility U U z zs= ( .......... )1 (4.1)

where z x ci i

i

n

==∑

1

(4.2)

and p x Yi i

i

n

=∑ ≤

1

(4.3)

where z represents a bundle of s characteristics;

x represents a bundle of n products, the price of each product xi being pi ;

each unit of product xi generates a vector of characteristics c c ci i is= ( ... )1 ;

Y represents the level of income in the budget constraint;

and zi , xi , pi and Y ≥ 0

Equation (4.1) shows the maximisation of utility as an objective function, and

assumes that every characteristic has non-negative marginal utility. This

assumption has been challenged by, for example, Hendler (1975) and Ladd &

Zober (1977). However, it remains useful in the context of location as a


characteristic if avoidance of an unwanted location is expressed as an inverse

distance relationship.

Equation (4.2) represents the consumption technology notion referred to earlier,

in chapter 2. Lancaster postulates firstly that each product generates a specific set

of characteristics, and secondly that aggregate bundles of characteristics

(including one which maximises utility) may be provided by alternative bundles

of products. This implies that consumption technology is linear; that is, that

consuming j units of product xi yields (jci) characteristics. It also implies that it is

possible to buy a combination of products whose aggregate characteristics may

match those of a different single product or combination; this has been termed

combinable consumption. Ladd & Zober (1977), Friedman (1983) and Bowbrick

(1992) are amongst the critics of these notions. Characteristics may be related in

a nonlinear way to multiple units of any one product, and combinations of two or

more products may be impossible or may not yield linearly combined

characteristics. In addition, many characteristics may be qualitative or perceived

rather than substantive (Bowbrick 1992).

Some of the above criticisms may be valid for the locational characteristics of

place-sensitive products if freely combinable purchasing were allowed. Let a unit

of a locational characteristic be defined as a period of time for which that

location is ‘rented’ by the consumer, and let one unit of the product consist of the

use of a facility, accompanied by appropriate services, during that same time

period. Then for any product xi, linearity of consumption technology is likely to

hold good in that multiple units of the product may yield multiple rental periods

of the location. However, locations are not combinable. Two days spent skiing on

a 1500-metre mountain do not necessarily provide the same characteristics

bundle as one day on a 3000-metre mountain. Two roomnights at a hotel eight

minutes from a central point do not necessarily provide an equivalent locational

characteristic to one night in a hotel four minutes from that point. This problem is

seen more clearly if it is accepted that location is primarily a quality or vertically-

differentiating characteristic. In a later work (Lancaster 1979 :28), Lancaster

shows that characteristics theory is concerned more with horizontal product


differentiation, where consumption technology is more likely to be linear than it

would be in vertical differentiation. The distinction between horizontal and

vertical product differentiation was examined in chapter 2.

In practice, purchasers of place-sensitive products are highly unlikely to combine

products (from within the same geographical area), since purchasers must travel

to a location for the act of consumption, and product combination would involve

extra transaction costs in travel and relocation. In addition, the characteristics of

place-sensitive products cannot be purchased separately. It has been shown that

the generation of utility by ‘fixed’ bundles of characteristics, of differing

qualities, can be assessed by characteristics theory (Feenstra 1995), and this is

posited to be the case for place-sensitive products.

The budget constraint shown in equation (4.3) above is expressed in terms of

money prices and a consumer’s income. Other budget constraints may also apply.

If one unit of a place-sensitive product is defined as above, in terms of a rental

for a period of time, the consumer is time-constrained as well as money-

constrained. Such a constraint may be added to the model defined above, in the

form:

t x Ti i

i

n

=∑ ≤

1

(4.4)

where ti represents one unit of time for the use of product xi ;

and T represents an overall quantity of time available to the consumer (ti and

T ≥ 0)

It has been shown in tourism, for example by Rugg (1971), that time is more of

an operational constraint than income for some consumers. Demand for place-

sensitive products may reflect this in the same way, if there are alternative

possible uses for a consumer’s time.


To establish aggregate demand for a product through characteristics theory, it

should be possible simply to sum the demand for a set of characteristics by any

group of consumers who possess similar patterns of utility (a single market

segment) (Friedman 1983), and perform similar, although separate, calculations

for other market segments. Once again, there is a difference between

characteristics in horizontal differentiation, where there may be several

conflicting preference groupings between market segments, and in vertical

differentiation, where it may be assumed that all consumers are likely to agree on

a preference for high quality over low quality (Tirole 1988). The implication for

fixed characteristics such as location was shown in chapter 2, where a

characteristic of access to any specific location such as a city centre or

recreational amenity (a horizontal differentiator) may be of importance to only

one market segment, whereas all consumers prefer a greater amount of a

neighbourhood quality characteristic (a vertical differentiator).

The solution to this problem lies in ensuring that the valuation of characteristics

is carried out for separate groups of consumers where their segmentation is based

on benefits sought, before summing aggregate demand over the segments

identified. Benefit segmentation (Engel et al. 1990 :97) establishes consumer

groups that possess similar patterns of utility across both horizontal and vertical

differentiators, and the methodology required to identify whether separate

segments exist is incorporated into chapters 5 and 6.

4.2.2. Consumer behaviour theory and product characteristics

A further problem in characteristics theory, which has been flagged in chapter 2,

is that of identifying which characteristics are important to consumers, and given

that no one product may possess a consumer’s perfect combination of

characteristics, how does the consumer make the necessary trade-offs to reach an

optimal choice?

These issues have been investigated by some writers in behavioural economics,

and more fully in the consumer behaviour segment of the marketing literature.


Bowbrick (1992 :271) points out that behavioural economists generally assume

that consumers are intrinsically perfectly informed at a conscious level about

their own wants and the efficacy of characteristics in meeting those wants. Dreze

& Hagen (1978) and Holmstrom (1985) note that market information has been

held to be a major determinant of consumer choice, by persuading consumers that

certain characteristics, and characteristics’ trade-offs, optimise their interests.

These writers criticise economists for being too simplistic in their approach to

issues in consumer choice.

Consumer behaviour literature addresses these issues by separating

characteristics from utility. One model suggests that utility depends on a set of

‘consumption services’ which in turn depend on quantities of characteristics

consumed (Ladd & Zober 1977). This is an example of a more general literature

on means-end models (Zeithaml 1988) which hold that ultimate utility is an

abstract value or emotional payoff, and that the ‘consumption services’ are

benefits or choice criteria related to product characteristics. A presentation of a

means-end model is shown in Figure 4.1.

Figure 4.1 Relationships in means-end models

Product

Attributes orcharacteristics

Benefits orchoice criteria

Emotional payoff or ‘utility’

Source: adapted from Zeithaml (1988)


In the type of means-end model depicted in Figure 4.1, a product possesses or

generates characteristics in an objective and technical way. However, there is a

functional relationship between benefits and characteristics which may differ

between consumers, and for an individual consumer may vary at different times.

The perceived benefits, or choice criteria, are subjective and inconstant - they

may perhaps be defined as ‘instrumental attributes’ (Zeithaml 1988) or ‘mega-

attributes’ (Bowbrick 1992). The value of these to any consumer is an abstract

payoff which varies with consumers’ psychological profiles, and in particular

with attitudes.

Lefkoff-Hagius & Mason (1993) argue that consumers’ preferences between

products are based on subjective user benefits and product image rather than on

the technical characteristics of products, although consumers differentiate

between products on the basis of (physical) characteristics. In addition, it has

been argued that some consumers regularly appraise products in terms of the

various characteristics offered and the various benefits obtainable, whilst others

do not, taking a holistic approach to product evaluation (Baumgartner 1993).

Whilst in general consumer behaviour theorists concentrate on product

evaluation through multiple characteristics (multiattribute models), others

suggest that a decision to choose one product over another may be influenced by

perhaps half a dozen determinant characteristics of that product (Engel et al.

1990). For a characteristic to be determinant it must be:

• important to a consumer, as a product benefit (or disbenefit); the relative

importance of each characteristic to a consumer is its salience;

• differentiable between products (Alpert 1971).

The identification of determinant characteristics and their contribution to the

overall evaluation of a product combine in expectancy-value models (Fishbein

1963 and Fishbein 1967). These models combine two variables, consumers’


‘belief’ about and ‘importance’ of characteristics held by products, to determine

intention to select those products for purchase. A model might typically take the

form:

A V Bj i ij

i

n

==∑ ( )( )

1

where:

Aj = the intention to select and purchase product j (j = 1, 2,... m)

Vi = the perceived importance of characteristic i to a consumer

Bij = the extent to which product j provides characteristic i.

Under this model, the consumer’s utility maximising situation is represented by

the maximisation of Aj.

Fishbein argues that consumers cannot meaningfully process the information to

examine more than a few characteristics of a product class. For very simple

products, or for those which are very similar in terms of most characteristics,

there may be only one or two determinant characteristics. When consumers

choose amongst complex products which differ in several characteristics,

Fishbein argues that no more than eight or nine characteristics are evaluated as

determinant.

Although early expectancy-value models are compensatory, allowing for a ‘good’

level of one characteristic in a product to compensate for a ‘poor’ level of

another, later models of consumer behaviour allow for non-compensatory

decision making (Engel et al. 1990; Green & Srinivasan 1990). In this case, any

one characteristic may be wholly determinant regardless of all others. It will be

shown in chapter 5 that the location characteristics of place-sensitive products are

not generally determinant on their own, but may compensate for, or be

compensated by, other characteristics. Determinant characteristics may be real

differentiators, or may in some cases be seemingly irrelevant or meaningless

differentiators (Carpenter et al. 1994) if they are perceived as unique or are


supported by persuasive advertising. For place-sensitive products, locational

differences between suppliers may be clearly discernible to consumers, but may

be over-enhanced by suppliers’ promotion for experience products yet to be

purchased. For example, many hotel brochures are close to misleading in claims

about hotel location. The second example of hotel advertising given in Appendix

4 uses an artist’s impression that may provide evidence of this.

4.3 Location as a demand characteristic of place-sensitive products

As discussed in chapter 2, place-sensitive products can be differentiated in terms

of locational characteristics which are broadly divisible into access, site

characteristics and neighbourhood characteristics. Research to identify directly

the level of determinance of locational characteristics is limited to a small

number of empirical studies, whilst more literature concentrates on indirect

methods of evaluation, such as stated preference and hedonic methods. These

methods will be investigated fully in chapter 5.

A survey of empirical evidence on the importance of various characteristics in

demand for housing is given in Timms (1971). Locational characteristics are

directly identified as determinant in most cases for purchasers of houses, and in

some cases for those renting units. The main locational characteristics cited are:

• distance or access to a CBD

• distance or access to places of work

• distance or access to retail shops

• neighbourhood quality (Timms 1971).

Any one or more of these may be determinant to house purchasers or renters.

Where neighbourhood quality is divided into separate characteristics such as air

quality, noise, local social and ethnic mix, and local crime levels, these


characteristics individually are often found to be salient, but are less likely to be

determinant. The situation where a characteristic may be salient but not

determinant occurs when alternative products under consideration for purchase

do not differ significantly in the level that they possess of the characteristic

(Engel et al. 1990, :96). In these cases, the influence of the characteristic on the

purchasing decision simply drops out. For example, air quality may be

determinant at the level of identifying a neighbourhood within which to look for

a house (identifying a choice set), but since the level of the characteristic does not

vary across the neighbourhood it is not determinant at the individual house

purchase decision level (Bartik 1988).

Other published results concern the characteristics salient to specific housing

markets and to other place-sensitive products. For purchasers of rural residences,

the degree of isolation is a salient characteristic (Joseph et al. 1989), with general

consumers’ preference for greater isolation provided that they have access to

paved roads. An empirical study of the high-rise apartment market along the

shore of Lake Michigan (Blomquist 1988) shows, using contingent valuation

methods, the importance to purchasers of a lake view. The amount of an

unobstructed view of Lake Michigan, measured in square metres, is an important

characteristic to purchasers, and is reflected in varying bid prices for otherwise

similar apartments.

Revealed preference valuation methods such as hedonic analysis, which will be

discussed in chapter 5, have been widely used to estimate the value of place-

sensitive characteristics in housing markets. They do not directly ascertain the

salience or determinance of each characteristic to consumers, but reveal the

implicit valuations that markets place upon each characteristic, thereby implicitly

showing the salience of that characteristic. Some of the most important

characteristics found are shown in Table 4.1:


Table 4.1 “Place” characteristics found by indirect valuation to be

determinant in housing demand

Characteristic Examples of citations

distance to CBD (Coulson 1991; Guntermann & Norrbin

1987; Jud & Winkler 1991; Straszheim

1987; Werczberger & Berechman 1988)

distance to shops, schools and parks (Dubin 1992; Jud & Winkler 1991;

Phipps 1987; Straszheim 1987; Williams

1994)

neighbourhood amenities (Bartik & Smith 1987; Can 1992)

neighbourhood ‘quality’ such as the

adjacency of housing

(Can 1992; Dubin 1992; Straszheim

1987; Werczberger & Berechman 1988)

site quality (Werczberger & Berechman 1988)

type of adjacent woodland (Garrod & Willis 1992)

These characteristics have been found to be salient throughout consumers’

decision making processes, but as noted above are only determinant in a situation

where there is some variability in the level of the characteristic between products

(houses) considered. Clearly, the current analysis of place-sensitive products

requires a characteristic to be variable, and therefore potentially determinant, in

order to generate product differentiation.

For place-sensitive products other than housing, access and distance from

consumers’ place of residence is found to be salient, and determinant, for

recreational amenities such as parks (Louviere & Timmermans 1992) and other

recreational sites for tourism. For the latter, closeness to other tourism sites and

facilities - leading to clustering, is also an important characteristic (Elwin 1989;

Miossec 1977; Mitchell & Lovingood 1976). For shopping centres, access time,

public transport access and parking are found to be salient characteristics

(Oppewal et al. 1994; Timmermans et al. 1992).


4.4. Consumer choice in tourism

4.4.1. Levels of choice in tourism

Because tourism is a composite product and is a relatively expensive item in

household budgets, consumer decision-making behaviour in tourism purchases is

likely to entail high-involvement extended problem-solving (Gilbert 1991).

Evidence suggests that consumers face a hierarchy of decisions in making

choices. This hierarchy may follow the means-end paradigm outlined in section

4.2.2, in that the ultimate payoff from a tourist experience is linked to the generic

decision about purchasing a trip, and that subsequent purchasing choices relate to

components of that trip.

Dann (1977) finds that the generic decision to purchase a recreational tourist trip

is based on motivation to escape from an everyday situation, and that such a

motivation ‘pushes’ a consumer to travel elsewhere. Consumers then move to

select a destination on the basis of its characteristics as benefits which will ‘pull’

the consumer to that destination rather than any other. A development of this

approach into a hierarchical formulation of decision making suggests that there

are three sequential stages:

• a generic decision to travel for some reason; then:

• a destination choice; then:

• a set of choices about trip components, such as accommodation, transport

mode and activities (Van Raaij 1986; Van Raaij & Francken 1984; Witt &

Wright 1992).

Witt and Wright (1992) invoke expectancy theory in finding that only a few

characteristics are invoked as decision criteria at each stage. For business

tourism, there may be no choices to be made at the first two stages; the reason for

travel and the destination are parameters in the process.


A hierarchy of consumer decision-making for recreational holiday choice is also

found by Hodgson (1983). However, she groups decisions in a different way

from those cited above, preferring:

• a decision of whether to take a trip or not (with other major household

purchases as potential substitutes); then:

• the type of holiday to choose; then:

• a destination, and finally:

• a choice of accommodation and tour operator or travel mode.

Tourism purchasing behaviour theory therefore seems to suggest that a choice of

destination, where there is a choice to be made, frequently precedes choice of

accommodation (and travel mode). This is confirmed in other empirical research

such as Jenkins (1978) and Mill & Morrison (1985). The latter cite evidence on

the vacation decisions of young families and older families, which vary slightly

in terms of choices to be made, but which both include choice of accommodation

as the final item. In terms of location as a product characteristic, there are two

clear and sequential levels of choice:

• choice of destination, which includes macro-locational characteristics in terms

of the tourist attractions offered; a destination may be a ‘monopoly product’

for business tourists who have to visit a specific organisation, or for

recreational tourists who require a specific attractional characteristic such as

the Eiffel Tower (Holloway 1994)

• choice of accommodation within a destination, where each supplier of

accommodation offers different sets of micro-locational, as well as service and

style, characteristics.

Goodall (1991) offers an example of the general appraisal of a destination and its

location followed by the specific appraisal of alternative accommodation by

suggesting that “attractive scenery” may be a destination characteristic, whilst

“beach access and a sea view” may be specific accommodation characteristics.


4.4.2. Choice and characteristics of hotels

The literature on hotel marketing contains a number of empirical studies which

relate consumer behaviour theory on characteristics and product choice to the

selection of hotels by various types of consumers. This approach is well

documented because of the view, noted in chapter 2, that hotel accommodation is

a complex product consisting of a number of services which may each possess

several underlying characteristics (Hartman 1989; Lewis 1981). Frequently,

location or some aspect of location appears as one of these underlying

characteristics.

Among the earliest studies are those of Mayo (1974) and Bush & Hair (1976),

which examine the determinant characteristics in consumer choice of motels at

which to stay. Bush & Hair find fourteen characteristics to be salient, including

location, which is one of the most important three determinants of choice. This

finding is echoed in several studies by Lewis throughout the 1980s. Consumers

are found to use multiattribute (multiple characteristic) evaluative criteria in hotel

selection (Lewis 1984a; Lewis & Pizam 1982), where salient characteristics are

not always determinant of choice. Determinant characteristics in these studies,

and also in Lewis (1985) and Lewis (1987) include personal service quality and

efficiency, room comfort, and location in all studies except Lewis (1985). This

latter finding is similar to that in Lewis & Nightingale (1991), where location is

found to be salient but not determinant of choice when there are many hotels

available clustered in close proximity to each other. There is another similar

finding in Saleh & Ryan (1992), where in a Canadian city with a wide choice of

accommodation, location is found to be only the eighteenth most determinant out

of thirty characteristics.

A small number of studies omit location in assessing characteristics, either

because of the clustering situation just described or because location is taken as a

given, from the first level of selection in a hierarchy of choice. Other

differentiating characteristics are found to be salient, such as check-in and check-


out procedures or room service quality (Bjorklund & King 1982; Goldberg et al.

1984), person-related, product-related and information-related services

(Nightingale 1986), and hotel building and room design features (Wind et al.

1989). Some of these differentiating characteristics, such as perceived quality,

lead to vertical differentiation where the possession of better quality will, cet.

par., result in higher demand than that of a competitor. Characteristics such as

room style and decor are more likely to produce horizontal differentiation, which

segments markets by preferences. For example, some consumers may prefer a

room with simple, uncluttered furnishings; others may prefer more ornate or

cosier surroundings.

Other studies, however, continue to stress the importance of location. Cadotte &

Turgeon (1988) divide characteristics of hotel accommodation products into

‘satisfiers’, ‘dissatisfiers’, ‘criticals’ and ‘neutrals’. They find that location is

normally a satisfier - that is, a location which offers positive advantages such as

fast access to a CBD, airport or tourist attraction, or good views, stimulates

demand and acts as a positive vertically differentiating characteristic. According

to Cadotte and Turgeon, in some cases a ‘poor’ location may be a dissatisfier,

where such aspects of location as remoteness or unpleasant neighbourhood

surroundings may reduce demand. This finding is echoed by Lewis & Chambers

(1989).

The notion that the location of hotel accommodation is both a determinant

characteristic and a vertically-differentiating characteristic receives further

support from Rivers et al. (1991), Barsky (1992), McCleary & Weaver (1992),

McCleary et al. (1993) and Richard & Sundaram (1994). The strength of the

notion is confirmed by its consistency amongst different types of consumer

group. Rivers et al. (1991) find that amongst consumers who are frequent stayers

in hotels, a location convenient to transport and amenities is one of the two most

determinant characteristics of choice. McCleary & Weaver (1992) and McCleary

et al. (1993) produce an identical finding for all business tourists, whether they

are frequent or occasional travellers. Barsky (1992) uses an expectancy-value

model to show that location is almost always a determinant characteristic, and


rational choice amongst consumers dictates a qualitative preference for a ‘good’

rather than a ‘poor’ location. Richard & Sundaram (1994) examine the

preferences of repeat purchasers, whether for business or holiday purposes, and

find that building quality, including its access, views and site quality, is one of

six determinant characteristics influencing demand.

As noted in chapter 3, the marketing strategies open to hotel accommodation

suppliers differ according to whether product characteristics are variable or fixed.

Characteristics which may be varied, such as service quality or room decor, allow

suppliers to engage in product strategy by, for example, establishing and

communicating changes in differentiating characteristics in order to contribute to

an overall individualistic product image (Lewis 1981). If the characteristics are

part of vertical differentiation, producers can maximise differentiation through

setting qualities to be as different as possible from those of competitors (Motta

1993) or can link high quality with a premium pricing strategy (Callan 1994;

Shapiro 1983). If the characteristics are horizontal differentiators, then producers

attempt to reach a profit-maximising spatial equilibrium. This is approached by

segmenting markets according to the sets of characteristics required by

consumers, so that consumers in each segment possess similar marginal rates of

substitution at similar levels of characteristics. Then suppliers develop hotel

products with the exact set of characteristics required by the target segment, and

brand them to generate consumer loyalty (Crawford-Welch 1993; Rounce 1987).

This is an example of attempting to maximise profits by a ‘focus’ strategy (Porter

1985).

If the differentiating characteristics between hotels are fixed on entry to the

market place, marketing strategy involving these characteristics is limited to

pricing and promotional activity. A large amount of hotel advertising

concentrates on fixed differentiators in terms of establishing an overall quality

image or establishing that the hotel is distinctively different from competing

hotels (Lewis 1981; Lewis & Chambers 1989; Rounce 1987). Further empirical

evidence of this will be seen in section 4.5.2 and in chapter 6. Pricing strategy

can then be used to take advantage of the monopolistically competitive situation


achieved through image-building promotion, by creating a price-quality or price-

style nexus in consumer perceptions (Morgan & Dev 1994; Shaw 1992).

Producers, however, usually relate prices to overall product quality or image

rather than to the differentiating effect of specific characteristics. Unfortunately,

it is shown empirically that when this happens the impact of price-quality

perceptions on hotel choice, and hence demand, is often highly variable (Shaw

1992). Morgan & Dev (1994) note that there is a need for further study on the

differentiating effects of ‘true’ characteristics of hotel accommodation, which is a

further justification for this current work.

4.5 Demand for international hotel accommodation on the Gold Coast

4.5.1. Demand trends and market conditions

Demand for tourism in the Gold Coast region dates from the late nineteenth

century and the opening of the railway from Brisbane to Southport. (Brisbane is

the capital and largest population centre of Queensland. It lies just over one

hour’s travel time to the north of the Gold Coast. Southport was at that time the

only commercial centre in the Gold Coast region.) The only form of tourism in

this region was recreational tourism based on sea bathing and watersports, so that

the main locational characteristic in demand was access to a beach and an estuary

for safe bathing. Southport developed close to the estuary of the Nerang River

known as the Broadwater (see maps in Appendix 5), well away from exposed

ocean beaches. In addition, visitors required other locational characteristics or

“secondary resources” (Ashworth & Tunbridge 1994 :58) such as access to

entertainment and sports activities supplied within the township of Southport.

Therefore in 1925, when the growing popularity of surfing led to the construction

of the first hotel near the ocean beach at Surfers Paradise (the Surfers Paradise

Hotel), its location was seen as being remote from the bulk of local tourism

activity (McRobbie 1966).

As surfing and other ocean-based watersports became more popular, the locus of

Gold Coast development shifted to Surfers Paradise. The Surfers Paradise Hotel,


rebuilt in 1937 after a fire, became the hub of the township on a through road

only 200 metres from the beach. The first apartment block (Biltmore, constructed

in 1952), and the first motel (Surfers Paradise Motel, constructed in 1955) were

situated nearby, and formed the nucleus of a growing cluster of development,

primarily of motels and flats from 1955 to 1970, and of apartments from 1975 to

1982 (McRobbie 1966; McRobbie 1984). Location of new accommodation units

clearly reflected demand for access to the ocean beach and to the entertainment

and recreational resources clustering in central Surfers Paradise.

During the 1950s and 1960s, the Gold Coast experienced a major growth in

demand from domestic Australian tourists, and became established as a

destination to which middle-income Australian families would return annually

for holidays (Australia 1990). However, the quality of the beach, the range of

secondary attractions and the proximity to Brisbane stimulated demand from

business tourists seeking convention facilities linked with recreational

characteristics, and increasingly attracted overseas tourists (Vader & Lang 1980).

The first two modern hotels built on the Gold Coast reflected alternative

approaches to location (see maps in Appendix 5); the Broadbeach Hotel (1956)

was built on a large block of absolute beachfront land - but in an undeveloped

area two kilometres from the centre of Surfers Paradise, whereas the Chevron

Hotel (1958) was built in Surfers Paradise - but the only suitable block was well

to the landward side of the centre. Both hotels provided function rooms for

conventions as a major source of business, and the Chevron was the first Gold

Coast tourism accommodation supplier to market itself to international tourists

(McRobbie 1984).

During the 1960s and 1970s, domestic holiday tourists to the Gold Coast were

found to derive increased utility from self-catering styles of accommodation

(Australia 1990). An increase in demand for this characteristic, cet. par.,

produces demand for holiday units and apartments rather than for hotels, but with

similar locational and style characteristics. Construction of units increased

markedly following the creation of strata titles in the 1965 Queensland Home

Units Building Act (McRobbie 1984), and was further boosted in the late 1970s


when the post-Vietnam war recession ended (Vader & Lang 1980). However,

international visitors (and many short-term domestic tourists) tend to demand

serviced hotel accommodation (Australian Tourist Commission 1994), and

during the early 1980s the highest growth in tourism to the Gold Coast was of

international tourism, as seen in Table 4.2:

Table 4.2 Growth in tourist numbers to the Gold Coast, 1980-86

1980 1986 Annual growth

1980-86

Total tourists 1.6m 2.2m 5.5%

International tourists 62000 145000 15%

International tourists as

% of total 3% 7%

Source: Queensland Tourist and Travel Corporation, Annual Tourism Statistics

This growth in demand led to the construction of the first international-standard

hotels on the Gold Coast in 1985 and 1986. Nine out of the first ten constructed

were partly or wholly financed or owned by Japanese businesses (ATM 1990).

The schedule of opening dates and ownership is shown in Appendix 6.

The locations selected by hotel developers largely reflect access to tourism

facilities found to be major attractors to those (mostly business and overseas)

tourists who are likely to select the Gold Coast at the level of overall destination

choice as in section 4.4.1 above. Other than the destination-wide attraction of a

high chance of good weather, in rank order these are shown in Table 4.3:


Table 4.3 Ranking of importance of attractions of resort destinations to

their main tourist markets

1. beaches

2. nightlife

3. shopping

4. restaurants

5. entertainment

6. local culture

Source: adapted from Australian Tourist Commission (1994)

Market research studies such as that of the Australian Tourist Commission

(1994) show that there is no significant variation between tourist market

segments visiting resort destinations in terms of the location characteristics

considered salient (although no study has been undertaken to determine whether

there is any inter-segment variation in determinance of such characteristics). If

the market is therefore relatively homogeneous, consumers may be expected to

have similar relative utility functions in relation to location characteristics, and

locational differences such as access to the beach or shopping areas can be

considered as vertical differentiators, with clear and similar preferences indicated

by all consumers. This issue, in the context of the Gold Coast, is dealt with

empirically in chapter 6.

Locations of international hotels on the Gold Coast are shown in the maps in

Appendix 5, and are described in Appendix 7.

4.5.2. Suppliers’ marketing activity

Because each Gold Coast hotel’s location and basic architectural design is fixed

by its construction, it is outside the span of control for product and product-mix

strategy as elements of marketing strategy. Of course, location is a major

variable, perhaps the most important, in determining feasibility of a new


development, but then becomes a parameter which cannot be altered in response

to any subsequent changes in the market's requirements.

However, location is commonly featured in promotion of the overall product.

Most properties include references to location within their own brochures,

classified or display material within guides, reservations listings and other

promotional material. Frequently promotional material will highlight and specify

any perceived locational advantage as a differential attraction of the property. It is

not always clear, however, whether suppliers have conducted primary market

research first, in order to assess whether consumers themselves perceive the

locational benefits to be important. They may rely on secondary research such as

that of the Australian Tourist Commission summarised in Table 4.3, or they may

rely on their own assessment of the location’s importance in attracting custom.

All eleven of the international hotels on the Gold Coast feature, or mention

prominently, location characteristics in their main promotional brochures. The

characteristics featured are mostly access or site characteristics. A summary of

promotional content appears in Appendix 7. The same characteristics are cited

for domestic business, domestic recreational and international consumers. In

promotion, each supplier clearly faces a conflict between the need to establish

differentiating characteristics and the need to communicate to the market that

their property rates highly in terms of the determinant locational characteristics

for that market. Once again, there is no evidence that any suppliers on the Gold

Coast have conducted empirical research on the determinance, or even the

salience, of these characteristics. Since the identification of such characteristics is

required for this study, this task is therefore carried out and presented in the first

part of chapter 6.

4.6 Conclusion

This chapter has examined the demand for products as sets of characteristics,

where those characteristics may provide consumer benefits to satisfy needs. It has


examined aspects of location as a specific, fixed characteristic of place-sensitive

products, with special reference to tourism products. It has shown that in

consumer choice for hotel accommodation, location characteristics may be

determinant, and that they are therefore likely to be important product

differentiators for suppliers.

The development, structure and characteristics of the Gold Coast hotel industry

have been outlined, in order to introduce the empirical study of location as a

fixed characteristic. The following chapter will examine alternative methods of

evaluating location within the market for hotel accommodation.

Analysis of alternative research methods 78

Chapter 5. Analysis of alternative research methods

5.1 Introduction

The previous three chapters developed and examined the concepts of location as

a characteristic of place-sensitive products, with particular reference to the

oligopolistic market for hotel accommodation. This chapter will:

(a) operationalise those concepts, and

(b) examine possible methods of empirical analysis.

In doing this, the chapter will investigate approaches to the development of a

model for analysing the roles of fixed characteristics in the type of market place

indicated.

The investigation of the locational characteristics of place-sensitive products

involves elements of economics, geography, marketing and behavioural science.

Each of these discipline areas has generated methods of data collection and

analysis. It is the purpose of this chapter to identify alternative methods of

research that may be suitable in this study, and to indicate which methods are the

most appropriate.

It will be shown that some combining of research methods is necessary in order

to deal with heterogeneous types of data, but that this heuristic leads sequentially

to the use of a single main paradigm in the later, main, analysis. In terms of

operationalising the necessary concepts, the methodology chosen must be capable

of:

• identifying determinant locational characteristics

• providing quantification of these characteristics


• relating utility valuation to both consumers and suppliers in an oligopolistic

market

• allowing for potential non-linearities in utility functions.

5.2 Qualitative methods

5.2.1 Using qualitative methods

Since the study of location as a place-sensitive product involves a partially

behavioural analysis, with notions of personal valuation by both suppliers and

consumers, and potentially a priori strategic decision making by oligopolistic

suppliers, then a qualitative study approach may be considered. This would

involve the collection and analysis of verbal data by discussion with individuals

or groups in order to explore the importance of location within consumers’

purchase decision making behaviour (Peterson 1987), and to develop views of

the determinance and individual valuation of specific locational characteristics.

This might be useful as an exploratory stage to develop hypotheses about these

characteristics which can then be tested by other methods.

Whilst qualitative research of this nature is likely to reveal rich data about

attitudes and intentions, there is a major problem inherent in using such an

approach as the main method in this study. The problem is the high general level

of subjectivity carried in the qualitative study of respondents’ own attitudes and

intentions, such that these may not validly reflect actual patterns of behaviour

(and hence the market place’s ex post objective valuation of locational

characteristics).

The use of qualitative research in a preliminary exploratory context, however, is

more helpful in order to clarify some of the background behavioural aspects of

the topic. Since the need is to gain insights into mental processes rather than to

observe or participate in physical behaviour, this requires the use of structured

situational methods. Common data collection techniques which might be used in

the above cases could be focus groups (Ratneshwar & Shocker 1991) and in-


depth interviews. However, because of the need to attribute responses referring to

behaviour directly to individual respondents, particularly in investigating

suppliers’ responses, focus groups are unlikely to be helpful, and have not been

considered here.

5.2.2 In-depth interviews

The practice of an in-depth interview has been defined as:

“an unstructured direct, personal interview in which a single respondent is

probed .... to uncover underlying motivations, beliefs, attitudes and feelings on a

topic.” (Knox 1986 :4)

It may be possible to conduct qualitative research to establish attitudes towards

the locational characteristics of place-sensitive products, using in-depth

interviews with producers, consumers and intermediaries. (In the case of hotel

accommodation characteristics the respondents would be hotel managers,

development consultants, travel agents, meeting planners and so on.) These can

be helpful as an exploratory technique in outlining the parameters for more

detailed field research, but are likely to be less useful in providing conclusive

economic data. The major difficulties are:

• it is difficult to obtain valid quantitative data from qualitative collection

methods (Peterson 1987 :435)

• there is a high chance of response bias, especially in the absence of a skilled

and experienced interviewer

• the importance, in an empirical test, of relating data to one specific market

place (it is argued that products in different geographical areas are not

substitutes for those in the study region, both in terms of specific locational

characteristics and that they are at a different level of hierarchical choice made

by consumers)

• time, cost and scope considerations.


In summary, the major strength of in-depth interviews is their ability to

investigate some of the subtleties of the behaviour which operators demonstrate

in a market, and hence to aid market analysis. However, the method has severe

weaknesses in the current context, in terms of subjectivity, its inability to reveal

quantitative measures of utility for characteristics, and thus an inability to provide

a testable model to value the characteristics of place-sensitive products.

Hence, in this study, qualitative in-depth interviews were used only at a

preliminary stage, and only with a small number of hotel managers and sales

managers representing the suppliers within the market place selected (the Gold

Coast). Their purpose was to clarify terminology, to provide evidence of

suppliers’ knowledge of and attitudes to the defined market, and to gain

exploratory insights into suppliers’ strategic decision making. The interviews

took the form of structured conversations that were kept value-free as far as

possible. The difficulties noted above were addressed by:

• restricting the use of the technique to qualitative clarification, to avoid mixing

the method with quantitative paradigms and to keep down the time and cost

involved

• undertaking training in interview techniques, to help minimise response bias.

The process and results are noted in chapter 6.

5.3 Contingent valuation

Another possible research method is to use survey techniques amongst potential

and actual consumers to find willingness-to-pay, or contingent valuation, for the

use of specific locations. Contingent valuation methods (CVM) have been

developed during the past thirty years as a technique of imputing values to

(primarily) public goods such as environmental goods. The methodology is well

established and documented (Cummings et al. 1986; Mitchell & Carson 1989). A

contingent market may be defined as a hypothetical market for goods not traded

as in ordinary markets, and CVM is held to offer flexibility in the ability to


measure non-use values such as existence, option and bequest values (Mitchell &

Carson 1989).

Surveys of willingness-to-pay (WTP) should reveal a hypothetical bid or demand

schedule for a non-traded good; however, since the technique is mostly applied to

public goods, any corresponding survey of willingness-to-accept (WTA) is more

concerned with hypothetical offers to accept value-in-exchange to forego access

to these goods rather than representing a genuine offer to supply. Using this

technique in the case of valuing location as a characteristic of place-sensitive

products therefore is restricted to valuation in demand.

In addition, techniques of CVM have been found very frequently to produce

measures of WTP that are biased in relation to other measures such as WTA or

revealed preference measures (Blomquist 1988; Cameron 1992; Carson et al.

1996; Hanemann 1991). Some surveys find a downward bias of WTP, compared

with alternative value estimates, of 50% or more (Brookshire et al. 1982), where

respondents suspect that a commercial user-pays fee may be levied on the basis

of their estimates. On the other hand, many surveys find that hypothetical

consumers overstate WTP for both public and private goods (NOAA 1993). This

may be due to poor description of the good or characteristic and its relevance to

consumers (Ujzen et al. 1996), or to “yea-saying bias”, where respondents offer a

level of WTP to a survey interviewer in an effort to please the interviewer rather

than to reflect truthful intentions (Whitehead et al. 1995). Furthermore, the

choice of elicitation method can produce different results, where WTP can be

elicited by open-ended questions, by dichotomous choice of a yes/no response to

paying various amounts, or by iterative bidding along a scale (whose starting

point and step sizes may also influence responses) (Bateman et al. 1995).

Since CVM is subject to these problems, it has mostly been used only in

circumstances where no methodological alternative is possible; for example,

when there are no actual or possible observable data available regarding

behavioural responses to valuation situations (Brookshire et al. 1982).


The major advantage of CVM is the ability to use the technique to develop utility

valuations in a situation where there is no commercial market valuation or data

available. It is possible to obtain quantitative valuations, and to use them in

classical models of utility. However, by using CVM the fixed characteristics of

place-sensitive products offered in an oligopolistic market can only be valued by

the consumers of those characteristics, since suppliers have already made their

decisions on entry and have no interest in varying characteristics.

If CVM were to be used in this study, this would involve the use of a structured

sample survey describing products which are identical but for their location, and

investigating what differential each consumer would be willing to pay. Locational

characteristics could only be specified as point categories, since the method does

not readily permit the estimation of multiple values for continuous variables such

as distance from a set location, even by using more complex, factorial survey

techniques (Goodman 1989). Because of the complexities of operationalising the

technique in this context, its limitation to a demand-side analysis, and its high

potential for bias in comparison with available indirect revealed preference

methods, CVM is not used in this study.

5.4 Conjoint analysis

One technique which can move towards a comparative analysis of the utility of,

and preferences for, characteristics of multiattribute products, is that of conjoint

analysis. Conjoint analysis is an extension of closed-ended CVM which allows

for the simultaneous evaluation of a number of product characteristics (horizontal

differentiation) and the level or quality of these characteristics (vertical

differentiation). It does not permit the direct estimation of the prices of these

characteristics, but estimates their utility comparatively to one another. Although

the technique has been widely used and reported in marketing literature for

measuring consumers’ evaluations, it can be used to evaluate suppliers’


alternatives in seeking to maximise profit from specific characteristic

combinations (Green & Wind 1975).

5.4.1 Conjoint preference models

Conjoint preference models have developed from analysis in mathematical

psychology including the seminal work of researchers such as Luce & Tukey

(1964), Shepard (1957), Shepard (1962) and Kruskal (1965). Conjoint models are

based on a decompositional approach, in which preferences for individual

characteristics are obtained from reactions by people to various overall bundles

of characteristics contained by real or imaginary objects. The orientation of this

technique towards the preferences of consumers for characteristics of products

was developed originally by Green & Devita (1973), Green & Rao (1971), Green

& Wind (1975), Johnson (1972), Johnson (1973), Johnson (1974) and others.

Conjoint analysis attempts to measure the relative importance or weight of each

characteristic as a proportion of total product utility, and then to estimate

functions which relate changes in individual utility (or ‘part-worth’) to changing

levels of existence of characteristics. Utility levels are not expressed directly in

dollar terms but in normalised proportional differences between product

characteristics. Since with multiattribute methods there are multiple possibilities

for interpersonal variation in utility and preferences, conjoint analysis is usually

carried out at the individual level (Green & Srinivasan 1990), and results can be

later aggregated for a consumer market or market sector.

A general conjoint model may be expressed (Green & Wind 1975; Louviere

1988; Rao 1977) as showing the individual consumer utility U of an alternative

Xi in the form:

U X w ci zj zj

j

k

z

s z

( ) ===

∑∑11

(5.1)

where:


wzj = the weight or part-worth utility contribution associated with the jth

level or value (j = 1, 2, ..... kz) of the zth characteristic (z = 1, 2,

..... s)

kz = the number of levels or possible values of characteristic z

s = the number of characteristics, where czj = 0 if characteristic z is not

present in alternative X, but czj = 1 if characteristic z is present

There are two major forms of preference model for conjoint analysis: ideal-point

and part-worth function models (Cattin & Wittink 1982; Green & Srinivasan

1990; Rao 1977), and characteristics may be expressed metrically or ordinally,

with preferences that are monotone or non-linear. Whichever model is used, the

utility function is expressed in terms of abstract units with the utility of each

characteristic being interpreted relatively to those of other characteristics. Part-

worth models for continuous variables generate explicit utility values u for each

level of a characteristic in the form:

u f ji z

z

s

iz==

∑1

( ) (5.2)

where fz is the function denoting the part-worth of different levels of jiz for the zth

characteristic. This enables direct comparison between utilities for each

characteristic and hence comparison between alternative products. Ideal-point

models posit that there is an (unknown) ideal set of preferences, or utility

maximisation point xz, for an individual consumer, and that the utility of specific

bundles of characteristics is inversely related to the squared distance di2 between

this ideal point and the utility-location generated by each characteristics bundle.

This may take the form:

u negf dj i= ( )2 (5.3)

where:


d w j xi z iz z

z

s2 2

1

= −=

∑ ( ) (5.4)

and negf represents some form of negative functional relationship.

In this model, characteristics bundles closer to the consumer’s utility-maximising

ideal point have a lower value of di2, thus enabling indirect utility comparisons to

be made.

Whichever form of conjoint preference model is used, reliability and empirical

predictive validity appear to be similar (Green et al. 1988a; Green et al. 1988b;

Green & Srinivasan 1990; Louviere 1988). However, direct estimation of a

monetary value for utilities is only possible if prices are included in a conjoint

analysis model as a product characteristic. Hence, it is common to find empirical

studies that do this.

Conjoint analysis in empirical use is relatively parsimonious in data needs. The

usual data instrument is a set of holdout cards, or self-completion schedule,

asking respondents to rate or rank products with alternative combinations of

characteristics (Cattin & Wittink 1982). From the variation in valuations of sets

of characteristics it is possible to estimate the trade-offs, or relative utilities,

which representative consumers have for each characteristic. Estimation is

normally by monotonic analysis of variance, and allows for an estimation of both

individual utilities of characteristics and the effects of interactions between

characteristics. One drawback is that the number of characteristics which can be

included in any one study is limited, by respondents’ interest and ability to make

trade-off judgments (Green & Wind 1975), to about five or six (Green &

Srinivasan 1990). The technique is amenable for use in modelling valuations

across complex hierarchies of choices in demand, but only by using repeated

measures such as hierarchical conjoint analysis (Louviere & Timmermans 1992;

Oppewal et al. 1994). For use in the investigation of the locational characteristics

of place-sensitive products, price would have to be included at each level in the

repeated hierarchy of analyses, including an analysis where each characteristic is


an individual locational characteristic of an overall location. Clearly, the

deduction of suitable price levels as inputs to the process would at best be

cumbersome, and perhaps not possible at all.

5.4.2 Relevant empirical applications of conjoint analysis

Despite some of the above problems, conjoint analysis has been used empirically

a number of times in areas of research in which location is relevant as a

characteristic of a place-sensitive product, and in particular in hospitality and

tourism research.

(a) Conjoint analysis applications to location

Empirical studies have been undertaken which treat location both as a

horizontally- and a vertically-differentiating product characteristic. Lewis et al.

(1991) mention a study of hotels in Fayetteville, Ak., in which four individual

locations were included as nominal-level characteristics, showing horizontal

differentiation, but the authors do not report on findings. Likewise, Oppewal et

al. (1994) report on consumers’ choice of shopping centre, where location is a

hybrid differentiator, involving differences in taste and multiple access (which as

shown in chapter 2 can be considered as horizontal differentiation), and Joseph et

al. (1989) demonstrate that individuals have differing preferences for isolated,

scattered or village locations for rural residences in Ontario, Canada.

Examples of empirical conjoint analysis where location is treated as a vertical

differentiator are studies by Haider & Ewing (1990), Kohli & Mahajan (1991)

and Louviere & Timmermans (1992). Haider and Ewing model consumer

preferences for resort hotel characteristics in the Caribbean, and include five

access characteristics: distance (in minutes) to a beach, to an airport, restaurants,

shops and sports facilities. In all cases these characteristics are defined

categorically with three levels of value, and in all cases the preference function is

monotonic, with closer access providing higher utility.

Kohli & Mahajan (1991) summarise a reservation-price study of apartment

choice for university students (based on a previous paper by Green et al. (1988a))


which includes one access characteristic: walking time to class, in minutes, and

one neighbourhood characteristic: the perceived safety of the location. Again,

both characteristics are treated ordinally. The purpose of this paper is to

determine optimal, profit-maximising apartment rents rather than to identify the

part-worths of characteristics, but in doing so each location characteristic is

treated as a vertical and monotonic differentiator.

Louviere & Timmermans (1992) use a study of preferences for outdoor

recreational settings in the Netherlands as an empirical illustration within a

theoretical paper on hierarchical conjoint analysis models. The study includes

both a horizontally-differentiated site characteristic: type of vegetation, and a

vertically-differentiated access characteristic: distance in minutes to reach the

area. As expected, respondents demonstrate a high level of preference variability

for vegetation type, but strong homogeneity in an almost linear decrease in utility

as travel time increases.

(b) Conjoint analysis applications in hotel accommodation

A number of studies have examined, and attempted to estimate, the values which

consumers put on specific characteristics of hotel products. Haider & Ewing

(1990) and Lewis et al. (1991) have already been mentioned in section (a) above.

In the study by Lewis et al., there is an attempt to value in dollars characteristics

such as room type, food and beverage inclusions, and amenities within a weekend

accommodation package at the Sheraton Hotel, Stamford, Ct. However, the

dollar valuations, which are linked to utility part-worths, come from exogenous

management or supplier estimations, thus introducing an indirect and subjective

influence into the model within the given context.

In other studies, Bjorklund & King (1982) examine architectural characteristics

and amenities for designing Caribbean resort hotels, whilst Renaghan & Kay

(1987) find meeting room quality and service to be important characteristics as

part of total utility for meeting planners. However, neither study provides specific

values for part-worths. Ding et al. (1991) summarise a number of empirical hotel


consultancy studies in the United States to indicate the value of conjoint analysis

as an aid to management decision-making.

Goldberg et al. (1984) and Wind et al. (1989) both use complex hybrid conjoint

analysis models to examine consumer preferences for multiple characteristics of

hotels. Goldberg et.al. specialise in the use of dummy variables to handle

categorical characteristics, such as whether there is an acceptable airport

limousine service or not. This paper faces difficulties firstly in that it asks

consumers to examine a large number of characteristics (43), and secondly in that

heterogeneity in consumer tastes results, in the model used, in unexpected

valuations for bundles characteristics compared with valuations of those

characteristics individually (Bresnahan 1984; Horsky 1984).

The study by Wind et.al. for Marriott Hotels groups fifty (50) characteristics into

nine facets, and treats these separately for data gathering. Once again, price is

included as a characteristic, but specific levels of price are determined

exogenously - by Marriott Hotels’ cost accounting department (Wind et al. 1989

:30). However, the study seeks to incorporate some cross-price effects by

including substitute branded hotels at different prices in the model. Locational

characteristics are not included in the main conjoint analysis so their utility

cannot be assessed, but they are dealt with by asking consumers to allocate 100

points among a set of locations based on their comparative attractiveness. No

empirical results are provided for this sub-study.

(c) Relevant conjoint analysis applications in other areas of

tourism

Applications of conjoint analysis to empirical problems of consumer choice in

various other areas of hospitality and tourism are found in a number of places.

Bojanic & Calantone (1990) investigate a simulated case of choice for types of

accommodation in national parks; Filiatrault & Ritchie (1988) and June & Smith

(1987) examine preferences for different characteristics of restaurants, whilst Toy

et al. (1989) and Bull & Alcock (1993) apply conjoint analysis to preferences for

facilities in clubs. In none of these cases are locational characteristics included in


the analysis. Preferences for specific countries or regions in which to undertake

tourist activity are included in empirical studies by Kent (1991), Morley (1993),

Muhlbacher & Botschen (1988) and Morley (1994), but at a categorical, whole-

country or regional level.

Conjoint analysis is also used to evaluate elements or characteristics of

recreational experiences within a trip. These may range from cultural preferences

(Cosper & Kinsley 1984) to types of boat and operator for recreational fishing

(Roehl et al. 1993). One study that includes access as a characteristic is that of

Mackenzie (1992), which examines hunters’ preferences for recreational

waterfowling in Delaware. Access is measured by travel time in hours to reach

the recreational site. Since total price (trip cost) is included as a characteristic, the

marginal value of access time can be estimated in money terms, and is shown as

-$37.07 per hour travelled (Mackenzie 1992 :180).

The latter paper demonstrates a dual problem for the use of conjoint analysis in

the context of fixed characteristics. Firstly, standard forms of analysis provide

only linear utility functions, whereas fixed characteristics such as location are

likely to involve non-linear changes in marginal utility to consumers. Secondly,

as Mackenzie points out (p175), it is normal in conjoint analysis to use ordinal

ratings and paired comparisons. If ordinary least squares is used as the method of

analysis, this violates classical economic theory which requires interval, and

preferably continuous, variables.

Since conjoint analysis is not particularly parsimonious in data and method, is

limited to consumers’ valuations of characteristics, and has the above problems,

it does not completely fulfil the criteria noted in section 5.1 above as necessary

for a suitable methodology in modelling the valuation of fixed characteristics for

place-sensitive products. Conjoint analysis is only used within this study as a

partial measure: to identify the nature of preference functions by establishing

ideal points, and as a general validity guide to implicit prices found by other

methods. To maintain as much richness of data as possible but allow


parsimonious estimation, characteristics are first identified by factor analysis.

This complete process is described in Chapter 6.

5.5 Hedonic pricing

5.5.1 Theoretical considerations

Where a composite product exists for which there is a commercial market place

and known market-clearing prices, hedonic pricing methods may be used to value

each characteristic of that product by disaggregating the product’s price. Hedonic

pricing is used to estimate the relationship between the equilibrium price of a

(heterogeneous) product and the contribution to that price of each determinant

product characteristic (Rosen 1974). This methodology is highly appropriate in

that hedonic models estimate simultaneously the implicit prices of all

characteristics, rather than attempting individually to identify each one.

Hedonic analysis is developed from characteristics theory, based on work by

Lancaster (1966), Lancaster (1971) and others as noted here in chapter 4, and

dates largely from the work of Rosen (1974). It also has been developed

specifically to adjust for quality differences in several dimensions in the

comparison of vertically differentiated products (Griliches 1971; Griliches 1988).

There are varying approaches to the technique, such as the ‘consumer reaction to

product characteristics’ model (Ladd & Zober 1977) and ‘land-price models’

such as those outlined by Sinden & Worrell (1979). These models are basically

similar to that of Rosen, however, in that they all derive implicit prices for

individual characteristics by regressing total product prices on varying quantities

of characteristics possessed by each (differentiated) product, thus indirectly

revealing the market valuations of preferences, or implicit prices, for each

characteristic.

Hedonic analysis models use market prices as the dependent variable, and are

thus estimating assumed equilibrium implicit prices rather than bid or offer

prices. As noted by Griliches:


"What is being estimated (by the hedonic regression) is actually the locus of

intersections of the demand curves of different consumers with varying tastes and

the supply functions of different firms with possibly varying technologies of

production. One is unlikely, therefore, to recover the underlying utility and cost

functions from such data alone, except in very special circumstances." (Griliches

1990 :189)

Thus, hedonic analysis reveals the implicit valuations that markets place upon

each characteristic, thereby implicitly showing the salience of that characteristic

jointly to suppliers and consumers. In the circumstances of attempting to estimate

bid and offer prices separately, this causes an identification problem (Clark &

Cosgrove 1990; Freeman 1979; McConnell 1990; Rosen 1974). In particular, it

has been shown that hedonic price estimates may often reflect supplier price-

setting rather than the result of a true demand-supply interaction since individual

consumers may not have the power to influence the hedonic price function

(Bartik 1987; Epple 1987). However, as shown below, where characteristics are

fixed in supply, this problem is likely a priori not to exist.

In hedonic analysis it is generally assumed that any individual only consumes one

type of the product on offer, and that individual consumers cannot influence

market prices. Further, suppliers are held to be able to produce differing bundles

of characteristics and determine output in relation to production costs.

Equilibrium necessitates that consumers each pay their marginal willingness-to-

pay value on the last unit of each characteristic consumed, and suppliers each

receive the marginal reservation price on the last unit of each characteristic

supplied (Bartik & Smith 1987).

An hedonic model may then be expressed as follows. Let a differentiated good z

consist of a bundle of differentiated characteristics zi such that:

z = (z1, z2, ...... zs) (5.5)


where each of the s characteristics zi represents the amount of that characteristic

associated with the good. The decisions of buyers and sellers are made as the

result of optimisation behavior related to the market price P(z) of the vector of

characteristics.

Consumers then maximise utility through a bid function that defines their

willingness to pay, at specific levels of utility and income, for varying values of

z. This bid function θ (z) is specified as:

θ (z) = θ (z1, z2, ...... zs, Y, α) (5.6)

where: Y = consumer income

α = a vector of taste preferences, and

the first partial derivative θ ∂θ∂

zii

zz

=( ) represents the consumer’s marginal

willingness to pay for an extra unit of zi.

Since θ (z) represents a consumer’s reservation price for z, and P(z) is the market

price for that ‘bundle’ of characteristics, utility is maximised where the surfaces

defined by θ(z) and P(z) are tangent. The model as originally defined by Rosen

(1974) then defines equilibrium for the consumer as a set of bid functions whose

envelope forms the hedonic price function, and each zi is at its optimal level with

∂θ∂

∂∂

( )zz

Pzi i

= for all i.

Producers, assumed to be profit maximisers, face an offer function of an

analogous type, given cost conditions defined by ‘production technology’. This

function φ (z) is specified as:

φ (z) = φ (z1, z2, ...... zs, Q, β) (5.7)


where: Q = the quantity of the product supplied

β = a vector of cost conditions representing a firm’s production

technology,

and

the first partial derivative φ ∂φ∂

zii

zz

= ( ) represents the supplier’s marginal

reservation price for providing an additional unit of zi. In a similar fashion to the

consumer’s case, optimality occurs for the supplier where the surfaces defined by

φ(z) and P(z) are tangent. The supplier’s equilibrium gives a set of offer functions

whose envelope is the hedonic price function, and each zi is produced at its

optimal level with

∂φ∂

∂∂

( )zz

Pzi i

= for all i.

Market-clearing equilibrium requires tangency between the bid and offer

functions, defined by the gradient of the equilibrium hedonic price function P(z).

This represents a joint envelope of bid and offer functions (Rosen 1974; Thomas

1993) such that θzi = φzi for all i. There are then simultaneous equilibria in the

implicit markets for each zi, where Qd(zi) = Qs(zi) for all i, and P(z) = P(z1, z2,

...... zs).

5.5.2. Hedonic pricing and locational characteristics

An advantage of the use of hedonic analysis is that implicit prices can be derived

for both supplier-determined and exogenous characteristics of products, provided

that market price data for the aggregate product is available. It is therefore

possible to identify implicit market prices for characteristics such as locational

variables and amenities within location-specific commodities such as housing

and recreation services.

The method has been used extensively in analysing the price of housing, both for

sale and for rent. An early summary of work in this area is that of Freeman

(1979), who summarises a number of empirical studies on housing where

particular attention is paid to the valuation of neighborhood characteristics,


especially air pollution, accessibility and public services, and neighborhood

socioeconomic and physical characteristics.

Later empirical applications of hedonic analysis show a further advantage in

being able to deduce separately an implicit price for each component of location,

such as distances and neighborhood characteristics. For example, the contribution

to house prices of endogenous site factors, amenities and local culture is assessed

by Bartik & Smith (1987), Blomquist (1988), Clark & Kahn (1988), Clark &

Kahn (1989), Deck (1987), Garrod & Willis (1992), Sirmans et al. (1989) and

Cheshire & Sheppard (1995). Endogenous neighborhood characteristics are

examined by Can (1990), Can (1992), Dubin (1992) and Palmquist (1992). The

exogenous characteristic of accessibility, for such features as distance (usually

measured in minutes) to shops, schools or a CBD as contributors to apartment

rents, receives empirical attention from Guntermann & Norrbin (1987), Jud &

Winkler (1991), Phipps (1987) and Williams (1994). These studies all examine

markets in which not only do individual consumers purchase one type of the

product on offer, but also suppliers are often individuals (such as house vendors)

with only one unit of the product to offer in the market. Thus these studies do not

address the situation of oligopolistic suppliers who make continual commercial

offerings to the market place, as is the case in the current study.

However, studies using hedonic analysis for pricing locational characteristics, as

well as other studies, have demonstrated that the technique suffers from two

major problems. The first is the identification problem which arises from using

estimated attribute prices as endogenous variables, as noted above; the second is

that the omission of any significant characteristic from the model is likely to

introduce bias from the likelihood that the omitted characteristic will be highly

correlated with included characteristics under equilibrium conditions (Epple

1987; Thomas 1993).

With respect to the first of these problems, for models involving place-sensitive

products, sunk costs and fixed capacities tend to result in supply inelasticity. As

will be shown in section 5.6 below, this may largely obviate the identification


problem, since variations in implicit prices cannot reflect any actions by suppliers

to vary quantities of characteristics offered, nor a supplier-generated implicit

offer price for any fixed characteristic based on a partial derivative. The second

problem requires care in the specification of models to ensure that all possible

characteristics that can contribute significantly to product variation are included.

This is an empirical concern, which will be taken up in chapter 6.

5.5.3 Relevant empirical applications to hotels and other tourism

products

Hedonic analysis has been used in a small number of studies involving the

disaggregation of prices for hotel accommodation and other tourism products. In

assessing the value of various characteristics of hospitality and tourism products -

not necessarily location - hedonic pricing is used by Carvell & Herrin (1990),

Clewer et al. (1992), Falvey et al. (1992), Sinclair et al. (1990) and Havrila &

Gunawardana (1995). It is also used by Corgel & deRoos (1992) and Corgel &

deRoos (1993) in valuing each characteristic of hotels as investment properties,

and by Hartman (1989) to explore design strategies for luxury hotels.

Clewer et al. (1992) use hedonic analysis to price the elements of inclusive tours

to European cities (London and Paris) sold in imperfectly competitive European

markets. The important characteristics whose prices are evaluated are the tour

operator brand and the quality (star rating) of hotels used. Location and other

fixed characteristics are not included.

Havrila & Gunawardana (1995) examine the characteristics of restaurant meals in

Melbourne, following the basis of Falvey et al (1992) in their study of restaurants

in New Orleans. In the Melbourne case, there are dummy variables for restaurant

location, comparing situations in four specific streets against a city centre

location. However, the authors do not set up any a priori hypotheses for the value

of alternative locations, and suggest in any event that any significant differences

are based on agglomeration economies, being linked with:


“prestigious restaurants clustered in certain locations offering ‘high quality’

meals and service” (Havrila & Gunawardana 1995 :233)

One interpretation of this finding is that ‘city centre eating’ is per se a different

market from those for meals in other areas, as defined here in chapter 2, and that

microlocational characteristics would be a more interesting inclusion in the study.

The three remaining papers include a locational characteristic, although none

attempt to price individually any of the separate sub-characteristics of place

sensitivity. Carvell & Herrin (1990) undertake an empirical study in San

Francisco which includes distance from Fisherman’s Wharf as a characteristic of

hotel room rates. Falvey et al. (1992) examine restaurant meal prices in New

Orleans, and include the effect of a single neighborhood characteristic, a dummy

variable showing whether a restaurant is situated in the French Quarter or not. In

a study of prices for inclusive tours to the Costa del Sol, Spain, Sinclair et al.

(1990) also use a dummy variable for whether or not a tourist hotel is ‘centrally

situated’ in one of the destination resort towns. A fourth paper (Arbel & Pizam

1977) uses contingent valuation to estimate the valuation of the location of a

hospitality property as a product characteristic for consumers. The findings from

these studies are as in Table 5.1:


Table 5.1 Findings from empirical studies of hospitality products and

their locational characteristics

Researchers Characteristic Detail Effect on room-rate

Arbel & Pizam (1977) Distance Hotels; minutes from

Tel Aviv CBD

rates fall 2-4% per 10

mins

Carvell & Herrin

(1990)

Distance Hotels; miles from

Fisherman's Wharf, San

Francisco

rates fall 52-55c per

mile

Falvey et al (1992) Neighborhood

characteristics

Restaurants; inside or

outside French Quarter,

New Orleans

(meal prices) $2.53

higher if inside

Sinclair et al (1990) Distance Hotels in tour

packages; in or out of

central Malaga, Spain

rates increase 3.7% if

outside

Of these results, the first two suggest that hotel room rates follow a simple

Alonso-Muth locational pattern, where rates fall, other things being equal, as

distance from a particular centre increases. This monocentric model would

require the ‘single centre’ to be clearly the most attractive place to be for hotel

customers.

The third result lends credence to the view that an attractive neighborhood with

specific tourist interest will permit a hospitality business to charge a premium

over one located anywhere else. Sinclair et al. (1990) echo this finding by

suggesting that there is a ‘better’ lodging environment for tourists outside the

centre of Malaga, Spain, and other local destination resort towns, to be closer to

beaches and away from the noisier and more crowded city centre. It would have

been interesting to view the results if the location characteristic were divided into

components such as distance from the CBD, distance from the beach, and

‘spaciousness’ of the hotel's surroundings.


5.5.4 Hedonic analysis as a suitable method of analysis for

investigating the locational characteristics of

place-sensitive products

In summary, hedonic analysis appears to offer a generally suitable method to

examine valuations of the locational characteristics of place-sensitive products.

In terms of the methodological requirements set in section 5.1 above, the

technique can provide for quantification and dollar valuation of locational

characteristics, and it can relate valuation to both consumers and suppliers

through revealed preferences generated from implicit prices in an existing market

place. The method does not constrain utility, bid or offer functions to be linear,

although problems of the choice of functional form need to be resolved. This is

considered empirically in Chapter 6, where the use of an external specifier

(conjoint analysis) is proposed.

The identification of all main determinant characteristics to enter into the model

is vital, to ensure that the model is correctly specified and avoids bias from

correlation with omitted variables as noted in section 5.5.2 above. Careful

examination of product differentiating characteristics, supported by qualitative

interview data, is the empirical mechanism proposed to achieve this.

5.6 An hedonic price model for fixed locational characteristics

The hedonic analysis methods presented in section 5.5 provide a suitable

framework for modelling implicit markets in the characteristics of place-sensitive

products. They provide an opportunity to estimate an equilibrium implicit price

for each characteristic, rather than just a demand-side valuation based on

consumers’ utility measures.

The problem is to provide a model for the valuation of characteristics that are

fixed in supply, such as the locational characteristics of place-sensitive products.

Accordingly, a significant adaptation of a ‘standard’ hedonic model is proposed

here, which takes into account supply and cost fixity of locational (and any other


non-variable) characteristics. The adaptation arises out of the situation in which

any consumer’s utility-maximising decision gives rise to a bid function in which,

at a given income level, all characteristics associated with a particular product

class are treated as variable in amount and value, but the situation facing any one

producer is not analogous: profit-maximising behaviour leads to an offer function

in which some, if not all, product-differentiating characteristics are fixed in

amount per unit of output, and increases in output bear zero marginal cost in

relation to these characteristics.

The adapted model may be set out as follows.

Let there be a class of commodities z embodying s characteristics, z = (z1, z2,

...... zs), and which has a quoted market price p(z).

Let the consumer utility specification follow Rosen (1974), where utility in a

consumption decision is obtained from a bundle of characteristics z, and from all

other goods g:

U = U (z1, z2, ...... zs, g) (5.8)

where the price of g is fixed.

This may be then used to produce a Rosen-type bid function:

θ = θ (z, Y, α) (5.9)

or θ = θ (z1, z2, ...... zs, Y, α)

where, as in equation (5.6):

where: Y = consumer income

α = a vector of taste preferences, and


the first partial derivative θ ∂θ∂

ziiz

= represents the consumer’s marginal

willingness to pay for an extra unit of zi.

Let the characteristics bundle z = (z1, z2, ...... zs) be divided into two types, such

that there are f characteristics z which are fixed in nature, such as locational

characteristics, once a decision to produce has been made, and f has a value of 0

< f < s. The remaining (s - f) characteristics are ‘variable’ in that suppliers can

alter the quantity of each characteristic through their production technology to

provide more or less product differentiation as required for profit maximising

behavior. The characteristics bundle may then be designated:

{ } { }( )z z z z z z zf f f s= + +1 2 1 2, ... , , ...

or:

( )z z zi j= , i = 1 to f, j = (f+1) to s

Then suppliers seeking to maximise profits develop an offer function somewhat

different from that in equation (5.7):

( )φ φ β= z z Qi j, , , (5.10)

where as in equation (5.7):

Q = the quantity of the product supplied

β = a vector of cost conditions representing a firm’s production

technology,

and:

for the zj , the first partial derivative φ ∂φ∂

zjj

zz

= ( ) represents the

supplier’s marginal reservation price for providing an additional unit of zj, but for

the zi ,φzj = 0 .


Equations (5.9) and (5.10) demonstrate the fundamental effects of the nature of

fixed locational and other characteristics as elements of products, in that

consumers who are faced with a choice of offerings can treat these characteristics

as variable, just as they would any other characteristic. Partial derivatives provide

implicit marginal values of willingness to pay. However, for producers it is not

possible to derive a marginal reservation price directly from production for fixed

characteristics. This is not to say that these characteristics are costless; they may

be classed as implicit fixed costs (Browning & Browning 1992 :203). From the

view of production alone, a ‘better’ location may be regarded as a more

productive input (Browning & Browning 1992 :267), even disregarding its value

as an output characteristic. However, valuing that location through an opportunity

cost is difficult, as it is split into units by use (such as a hotel’s location which is

split into hotel room units), and it is non-disposable without ceasing production.

For locational characteristics then, clearly a marginal reservation price to

suppliers of zero is ‘unrealistic’, but an hedonic valuation of characteristics,

representing consumers’ willingness to pay, should set an equilibrium offer price

which also represents a supplier’s implicit cost. The situation is analogous to that

of a producer of bundled goods, where the producer has a monopoly on some of

those goods but not on others, as shown in Figure 5.1 (a) and (b).


Figure 5.1 Pricing decisions for the producers of bundled characteristics

Diagram (a). A pricing decision for non-monopoly, variable characteristics.

Diagram (b). A pricing decision for fixed characteristics whose average cost is

unknown but whose marginal cost is zero.


Diagram (a) in Figure 5.1 depicts the optimal situation facing a supplier of

‘variable’ characteristics. The situation is that of the normal producer facing

imperfect competition, where marginal cost MC is equated with marginal

revenue MR. In the case of the characteristic zj, the implicit price is 0P and the

equilibrium quantity of that characteristic included in the bundled offering is 0Q.

For fixed characteristics (see diagram (b) of Figure 5.1), marginal cost MC = 0,

and average cost is unknown. However, if suppliers continue to equate MC to

MR for each characteristic (Feenstra 1995), then the implicit price of the

characteristic is set by demand for that characteristic when MR = 0; that is, price

0P1 in diagram (b) if demand is represented by AR1. Should demand shift, say,

to AR2, then the characteristic’s implicit price changes to 0P2.

Since additionally the quantity of fixed characteristics offered is fixed de facto in

the short run, the locus of implicit prices for fixed characteristics zi therefore

represents bid prices by consumers. This is because suppliers in a Bertrand-type

oligopoly or other price setting situation are maximising profits across the whole

set of characteristics ( )z z zi j= , , and have no desire to act to shift demand

overall for z in order to influence the implicit price for any fixed characteristic.

Accordingly:

• suppliers are short-run implicit price takers for fixed characteristics, and

• the identification problem previously noted for hedonic models generally

should disappear in the case of fixed characteristics, since the model is using

marginal bid prices to generate equilibrium values.

5.7 Conclusion

This chapter has investigated alternative research methods that may be available

to analyse the values of locational characteristics of place-sensitive products. It

has rejected some methods as being unable to fulfil the criteria set out in section


5.1 above, and has demonstrated that hedonic analysis offers a suitable

methodology to address the issue, with the aid of conjoint analysis at a prior stage

of empirical study.

Further, the chapter has developed a model, based on the use of hedonic prices,

which can be used to identify the values of locational and other fixed

characteristics as implicit, bid-determined prices. Chapter 6 details, through this

model, an empirical investigation of the locational characteristics of hotel

accommodation on the Gold Coast as previously described in section 4.5.

Empirical valuation of locational characteristics 106

Chapter 6. Empirical valuation of locational

characteristics

6.1 Introduction

The hedonic model developed in chapter 5 gives rise to an hedonic price function

of the form:

P z P z z z z z zf f f s( ) ( , .... , , .... ){ } { }= + +1 2 1 2 (6.1)

This chapter and the following chapter describe an empirical study testing

equation 6.1 as a method of valuing the fixed characteristics of place-sensitive

products.

Two major issues which this chapter addresses are:

• the determination of all significant variables (characteristics) which relate to

the market for hotel accommodation as a location-specific place-sensitive

product, both to ensure substantive validity and to avoid any specification bias

that could be caused by omitting variables

• the choice of a suitable functional form that meets hypothesized relationships

between characteristics and their expected contribution to product prices.

The following chapter provides the results of the empirical tests.

6.2 The study area

The rationale for the choice of market and area to study can be re-stated at this

point. Firstly, most tourism services provide good examples of place-sensitive

products, since consumers are tied to particular locations in which to enjoy


consumption. Secondly, the demand for tourism gives rise to a derived demand

for tourist accommodation in destinations, a sector of which is accommodation in

international-standard hotels. Quantities of such accommodation are provided by

a number of suppliers in any one destination, and typically the suppliers are few

enough in number to constitute an oligopoly in that destination market. Thirdly,

the Gold Coast, in Queensland, Australia, was chosen as a good example of such

a destination market, where the locational differentiation between hotel rooms is

based on the fixed characteristics of site, neighborhood and distance to specified

core tourist attractions.

For this study therefore, the destination area definition is that noted in section

3.4.4, and the market can be defined as “the market for international-standard

hotel accommodation on the Gold Coast of Australia”. To justify this

nomenclature there is a minimum standard level of characteristics (services and

facilities) which are pre-requisite, as also noted in section 3.4.4 and in Appendix

2. This also corresponds to a ‘four star rating’ designated by the National Roads

and Motorists’ Association (NRMA):

“All units with private bath, shower and toilet, wall-to-wall carpeting, ample

heating/cooling with individually controlled air conditioning, high quality furnishings and

comfort, individual bed lamps and one or more armchairs. Full restaurant service with room

service available at least from 18.00 to 23.00 daily.” NRMA Accommodation Guide 1992:12

These characteristics are then assumed to exist for all suppliers. However, some

suppliers differentiate their products by offering specific extra product

characteristics which merit higher grading, of ‘four and a half’ or ‘five’ stars (see

also Appendix 2). These set bundles of extra, vertically-differentiating

characteristics are included in the current analysis as a single variable.

The heterogeneous product z is then defined (see section 3.5) as a roomnight in

an international standard hotel on the Gold Coast. From section 3.4 and

Appendix 3, there is a fixed total maximum supply R in the market of 3933

roomnights on any one night. Over time period t, capacity supply S = Rt so that if

t = one year, then S = 3933(365) = 1,435,545 roomnights. Following Lovelock


(1992b) and the discussion in section 3.5.2 above, optimum market supply is

likely to be a little less than this level, but highly inelastic.

Although the possibility of outside goods, such as serviced apartment units,

intervening in the market has already been discussed, for reasons of parsimony

non-hotel products are not included in this analysis. However, all properties in

the Gold Coast division that are classed as ‘international hotels’ or ‘international

resorts’ are included.

6.3 Determination of product-differentiating characteristics

6.3.1 Exploratory analysis

The first stage in the empirical study was an exploratory analysis, in order to

provide consistent terminology, to clarify variables. This was accomplished by

conducting a number of semi-structured in-depth interviews with managers in

Gold Coast hotels as representative of suppliers. In addition, the interviews were

designed to provide evidence of suppliers’ knowledge of and attitudes to the

defined market, and to gain exploratory insights into suppliers’ strategic decision

making.

In all, six (6) interviews were conducted, with managers in the ANA, Conrad,

Gold Coast International, Royal Pines, Sheraton Mirage and Travelodge hotels.

Three respondents were sales managers, one a general manager, one a marketing

manager and one a finance manager. All had some form of responsibility for

pricing. The interviews took the form of structured conversations, each lasting for

around one hour, and followed the same general pattern of prompt questions, on

the subjects of:

• where responsibility for pricing decisions lies within the hotel management

structure

• on what basis room prices are set


• the nature of actual (ex post) room prices compared with published rack rates

• the extent of discriminatory pricing to different market segments

• whether different market segments might be expected to value different

product characteristics

• what characteristics, in the suppliers’ view, contribute to positive or negative

price differentials.

All respondents agreed that in general, individual hotels set their own basic room

rates (rack rates), and if they are members of chains this is usually subject to an

overriding corporate policy on image, marketing and cost allocation. Pricing

decisions are usually agreed by a senior management team. The pricing method

of most hotels is in line with the methods outlined in section 3.5.3, where hotels

establish a basic set of prices by cost-plus or breakeven methods, but pay some

attention to product differentiation and the effect that this might have on

consumers’ willingness to pay. It was agreed by respondents that three hotels

(Sheraton Mirage, Marriott and Hyatt) are sufficiently ‘distinctive’ that prices

may be primarily based on the individual property as an international competitor,

whilst other hotels reflect more the competitive prices ruling in the Gold Coast as

a destination. However, all respondents agreed that this distinction is not

sufficient to impair the basic homogeneity of the market.

What is more important in the real market place is the actual prices charged

rather than published rack rates. Indeed, one hotel no longer publishes rack rates

but keeps them only as a personal guide to maximum or desired prices, and other

hotel operators are following this trend. There is a range of discounting and

discriminatory pricing practices which reflects varying elasticities of demand in

different market segments and at different times, coupled with promotional

pricing. For example, almost all operators agree that it has become an ‘industry

standard’ to include a full breakfast, at cost, in rates as a promotional tool,

hoteliers knowing that not all consumers will consume the breakfast despite

paying for it. In addition, all hotels offer a different set of prices to tour operators

and groups from that offered to individual consumers.


To suppliers overall, a measure of the aggregate ex post prices achieved in the

market place is the weighted average of the various room rates charged, weighted

by the proportion of roomnights sold at each rate, and generally known as the

Average Daily Rate (ADR). This figure, together with occupancy levels achieved

at specific times, is monitored and modified by yield management programs

(Badinelli & Olsen 1990; Hanks et al. 1992; Kimes 1989; Orkin 1988; Relihan

1989; Sheel 1994). These programs do not, however, take into account product

differentiating characteristics or the actions of specific competitors in setting

prices.

There were some differences between respondents as to the importance of

specific characteristics to different market segments, and their expected

contribution to price. The age of a hotel property, or the length of time since its

last refurbishment, is considered by some to be an important characteristic,

whereas to others the marketing cycle is more important. Service quality and

speed is held to be universally important, where sales and PR service together

with corporate facilities are salient characteristics to business and convention

guests. However, it is felt that these facilities do not contribute directly to prices

but act as ‘value-added’ services linked with hotel promotion.

Respondents agreed that location should contribute to hotel prices, but

individually and collectively had little or no idea of its value. Most agreed that

ocean or beach access should command a premium, but there was disagreement

on whether a CBD or a ‘well-out-of-the-centre’ location should be more

valuable. Discussions reinforced the view that no conclusive research has been

carried out on the location-price issue in the local market.

It was therefore evident from the exploratory analysis that P(zi) for hotel i should

most probably be formulated as the average daily rate (per roomnight) in that

hotel for an aggregate market, or as a range of prices P(Zij) if it were more

appropriate to analyse pricing and characteristics in j market segments

independently. It was also evident that the general locus of control over their


offer prices lies with the hotel management teams in the study area, but these

teams have no formal knowledge of the contribution to those prices which

location and other fixed characteristics may be expected to have.

6.3.2 Identification of characteristics from promotion and other

sources

The next step in the empirical analysis was to identify significant differentiating

characteristics between products. In order to do this, a content analysis was

undertaken of the brochures and other promotional literature published by the

eleven international hotels on the Gold Coast, to determine what locational and

other characteristics are cited in hotels’ own advertising efforts. The results were

compared with those characteristics cited in previous studies as being

determinant to hotel selection, as detailed in section 4.4.2, to ensure that

terminology was consistent. Cross-checking with these studies was also

necessary to show whether any characteristics generally found to be determinant

to consumers had been omitted or ignored by Gold Coast suppliers. This

appeared not to be the case. Any characteristics that are common to all suppliers’

products by virtue of being part of the standard minimum ‘four star’ rating were

then discarded as being non-differentiating within the market being studied.

This process yielded the following 42 characteristics:

1. Closeness to night-time entertainment

2. Closeness to the beach

3. Closeness to a main shopping area

4. Closeness to a marina

5. Direct access to the beach

6. Closeness to a golf course

7. An uncongested or quiet location

8. Extent of the view from the room window

9. Tennis courts in the hotel/resort grounds


10. A low-rise hotel or resort

11. Sunbathing areas in the hotel/resort grounds

12. Architecture in keeping with the surroundings

13. An ocean view from the room window

14. Gardens around the hotel/resort

15. A swimming pool in the hotel/resort grounds

16. Comfortable sitting area in the room/suite

17. Gymnasium or fitness centre available

18. Modern architectural style

19. Co-ordinated room decor

20. Spacious lobby area

21. A sauna available

22. Comfortable lobby area

23. A very spacious room or suite

24. A spa in the hotel/resort grounds

25. Expensive decor in lobby areas

26. Limousine service to/from the hotel/resort

27. Early morning room service

28. Extra large beds (eg king size)

29. Organised children's activities/playground

30. Efficient check-in and room service staff

31. Valet service for shoes

32. Late evening room service

33. All day room service

34. Personal butler service

35. A minibar in the room

36. Valet service for guest laundry

37. In-house live entertainment

38. Very comfortable beds

39. All night room service


40. Friendly check-in and room service staff

41. Thick carpeting in the rooms or suites

42. Porter service to and from rooms

It can be seen from the above list of differentiating characteristics that:

• 7 relate to location of the hotel (numbers 1 - 7)

• 8 are site characteristics (numbers 8 - 15)

• 10 relate to other aspects of the hotel property and are generally fixed in nature

(numbers 16 - 25)

• 17 are variable characteristics (numbers 26 - 42).

Gold Coast international hotel advertising therefore concentrates on establishing

product differentiation mainly through fixed characteristics (25 of the 42 listed).

Hotel brand name was not included as a variable in this analysis, as it has been

shown that brand names for the type of ‘one-off’ purchase in hospitality that is

found on the Gold Coast are unlikely to be important characteristics (Morgan &

Dev 1994; Rounce 1987).

The procedures outlined in this section and the previous one were necessary to

address the problem of care in the specification of the hedonic model to ensure

that all possible characteristics that can contribute significantly to product

variation are included. Clearly, however, consumers are extremely unlikely to

consider all 42 characteristics as evaluative criteria in decision making, and it

was important to consolidate these characteristics, both in terms of their

determinance to consumers and to permit parsimonious estimation.

6.3.3 Selection of determinant characteristics

To consolidate and establish the determinance of product differentiating

characteristics, a questionnaire survey was administered to a sample of 340

consumers (hotel guests) across the eleven Gold Coast international hotels. The

questionnaires were completed during a four-month period, through self-


completion by consumers. All questionnaires were handed out and collected

directly back from repondents. Consumers were selected by proportionate

stratified quota methods, where a quota within each stratum was set for data to be

collected at a specific time. Stratification was by:

• domestic/international visitor, and

• purpose of stay (business or recreation as the primary motive).

The proportions of different types of visitor were averaged (from hotel records

and Gold Coast Visitors and Convention Bureau statistics) across all the hotels,

and a uniform sampling fraction was applied to ensure that there would be a

proportionate stratified sample. This sample design was chosen in preference to

non-stratified designs since stratification improves the correct representation of

the population and is likely to improve precision (Moser & Kalton 1993).

Within each stratum quotas were set to reflect the proportions of each type of

visitor known to patronise international-standard hotels. Since there were only

two stratification factors, each offering two strata, it was simple to apply the

resulting four strata as interrelated quota controls. Full stratified random

sampling was not possible, owing to time and resource constraints, since it

would have required a much more lengthy longitudinal study with access to hotel

guest records to develop a sampling frame, and even this might not have

provided accurate information about purpose of stay. It is acknowledged that

quota sampling has the disadvantage that within-stratum representativeness, and

therefore sampling error, is unknown (Konijn 1973; Moser & Kalton 1993).

However, quota-within-stratum methods have been found to provide a generally

valid representation of the opinions and attitudes of populations in surveys of

this type (Stephan & McCarthy 1958; Cochran 1977; Parasuraman 1986).

The questionnaire is shown in Appendix 8. Respondents were asked to rate, on a

five-way scale, the importance of each characteristic in selecting a hotel at which

to stay. Of the 340 respondents, 304 provided useable responses, which were

analysed by SPSS (SPSS Inc. 1993) and Statistica (StatSoft Inc. 1993) computer

programs. Computer codes for the variables, together with the mean rating


scores, are shown in Appendix 9. Of the 42 variables, 14 only achieved a mean

score of less than ‘quite important’ (mean rating score >3), and were dropped

from the analysis as being unlikely to be either salient or determinant, in line with

the direction of the analyses by, inter alia, Cadotte & Turgeon (1988) and

McCleary et al. (1993).

To test whether significant differences in the rating of characteristics exist

between the stratified groups, a two-way analysis of variance was undertaken.

Consumer tourist type (business/convention or holiday) and place of residence

(domestic or international) were the independent variables, and ratings for all

remaining 28 characteristics were the dependent variables. Detailed results are

given in Appendix 10.

At a 95% level of significance, only one characteristic (gardens around the hotel)

was found to have a rating which varied significantly between groups in the two-

way analysis (F = 5.5731 p = .019). There were no significant differences for

the remaining 27 characteristics. On one-way tests, international and domestic

visitors differed significantly on the importance of only three characteristics all

relating to a hotel room: bed comfort, comfortable seating and spaciousness. In

all cases international visitors placed a somewhat higher importance on these

characteristics. Business and holiday consumers differed in respect to bed

comfort, bed size, porter service, room spaciousness and decor, and a sauna.

Holidaymakers placed more importance on a sauna, business people rated the

remaining five characteristics more highly. There were no significant differences

with respect to any other characteristics.

Since the analysis of variance showed so few significant differences between

groups’ opinions, which concurs with the findings of the Australian Tourist

Commission (1994) described previously in section 4.5.1, it was decided to treat

respondents as from a homogeneous population, and so all data were treated in

aggregate.


To provide a parsimonious data set, a factor analysis was applied to the data (28

variables). This was preferred to other methods such as the iterative stepwise

procedures used by Chakraborty et al. (1992) or the hierarchical conjoint analysis

used by Louviere & Timmermans (1992) on the grounds of simplicity and

reliability. Since the major goal of the analysis was data reduction, principal

components analysis was used rather than principal factors analysis. The results

of the procedure are given in Appendix 11. Using the Kaiser criterion (Kaiser

1960) that factors extracted should possess eigenvalues greater than 1, seven

factors were extracted from the data. These accounted for 68.7% of total

variation. Factor rotation was performed to reduce dependence on the first-level

factors, although the change was not substantial. The method chosen was

varimax rotation on raw scores, to maintain orthogonality and maximise variance

to produce distinct clusters as factors.

This factor analytic procedure resulted in seven factors. The main factor loadings

for variables associated with each factor are shown in Table 6.1.


Table 6.1 Factors extracted associated with variables’ factor loadings

Factor 1 Factor 2 Factor 3

morning room service .7881

evening room service .8876

all day room service .8861

minibar in room .7528

night room service .8703

extent of view .7044

closeness to beach .8553

sunbathing areas .6353

ocean view .8418

beach access .7882

swimming pool .5727

sitting area comfort .6632

room decor .8221

spacious room .6313

comfortable beds .7634

porter service .6348

Factor 4 Factor 5 Factor 6

entertainment close by .8581

close to shops .8480

live entertainment .8416

gardens -.5297

quiet location -.6809

comfortable lobby -.6258

low-rise hotel -.7897

architecture in keeping with the

environment -.7926

efficient staff .8631

friendly staff .8304

Factor 7

king-size beds -.5950

sauna .7628

All factors loaded cleanly, and all except factor 7 were capable of meaningful

interpretation as ‘major product characteristics’. The factors identified were

named as indicated in Table 6.2:

Table 6.2 Identification of factorsFactor Eigenvalue % of

variation

1. quality of room service 3.93 14.02

2. location convenient to the beach, ocean views and ‘sun’ 3.60 12.85

3. room comfort and space 2.89 10.31

4. location convenient to entertainment and shopping, ‘lively’ 3.17 11.31

5. hotel public area architecture 2.16 7.72

6. quality of staff 1.90 6.80

Cumulative percent of variation explained: 63.0%


It was impossible to interpret factor 7 meaningfully as there seems to be no

logical connection between a preference for a sauna but not for a large bed size.

The cumulative percent of variation explained by the remaining six factors, at

63%, reflects the large size of the original sample of observations, and the

resulting variability in attitudes.

By definition, some of the resulting ‘major characteristics’ are common to all

international Gold Coast hotels. All have a ‘4-5 star standard’ of physical room

quality, swimming pool, sauna, spa and sports facilities, and are modern

buildings. The significant characteristics causing product differentiation would

therefore be numbers 1, 2, 4 and 6 from Table 6.2.

This factor analytic procedure produced four major product differentiating

characteristics, all of which are significant within consumer choice. This enables

further estimation to be parsimonious, whilst ensuring that all significant

characteristics are covered within a hedonic specification to meet the

orthogonality conditions required by the technique, and to avoid bias.

6.4 Consumer valuation of characteristics

Having identified important differentiating characteristics, both those which are

fixed and those which are variable, it is useful to gain some insight into the

nature of the utility which consumers are likely to place on these characteristics.

This is necessary in order to provide some theoretical validity to the specification

form of the hedonic analysis. As noted in section 5.5, conjoint analysis is used

within this study as a means to identify the general nature of preference functions

(especially for fixed characteristics), by establishing ideal points and the

relationship between utility and value of each selected characteristic.

Since the use of conjoint analysis in this study was limited in this way, a small

number of assumptions were made for the use of the technique. Firstly, it was


assumed that increases in the level of personal service (room service and staff

quality) give rise to a linear increase in utility, so that ‘service quality’ is a linear

vertically differentiating characteristic. This is in line with the findings of other

studies (Renaghan & Kay 1987; Rivers et al. 1991). Service quality was

therefore not included in the conjoint analysis.

Secondly, since consumers interviewed in the preliminary factor analysis had

been found to be relatively homogeneous in preferences, respondents in the

conjoint analysis were expected to have similar relative utility functions in

relation to location characteristics, with similar preferences indicated by all

consumers. Conjoint analysis provides a further check on this by reference to

comparisons between the relative importance of characteristics calculated for

individuals and that calculated for the ‘average’ respondent.

Thirdly, it was assumed that there would be no significant interactions between

characteristics. This assumption is partly due to the nature of the conjoint

analysis program used, where designs are orthogonal arrays; additionally, the

inclusion of interaction terms reduces degrees of freedom and predictive

accuracy, and may not significantly improve the analysis (Green & Srinivasan

1978; Lynch 1985; Moore & Holbrook 1990).

A conjoint analysis study was then set up, using a standard conjoint designer and

analyzer computer software package (Bretton-Clark 1990) for analysis.

Characteristics 2 and 4 from the factor analysis described in section 6.3 were

expanded into three variables:

• distance to shops and entertainment (SHOPS)

• distance to the beach (BEACH)

• extent of the view from the window of a hotel room (VIEW)

In addition, the price of a room per night (PRICE) was included as a comparison

variable.

The conjoint design was then set up with four feature levels of each characteristic

except PRICE, which included five feature levels. In each case, the selection of


the number of levels was a compromise between the need for data richness, and

the answerability and analysability of the data collection instrument. Through the

conjoint designer program, a full-profile study required 26 cards. Since it was

necessary to allow for marginal implicit values to be constant or variable, where

possible the design was specified as an ideal-point model, which allows utility

functions to be linear or non-linear. This specification was applied to SHOPS and

BEACH (expressed quantitatively as travel distance in minutes), whilst VIEW

was specified categorically with a part-worth model, and PRICE as a linear

vector model. As a result, the study had 17 degrees of freedom, with a cards /

parameters ratio (n/T) of 2.89, which is well in excess of the level of 2

recommended as a minimum (Green & Srinivasan 1978; Mullet 1989). (See

Appendix 13.)

The data collection instrument is shown in Appendix 12. Rather than using cards,

it was designed as a single sheet with rating scales for each of the alternative

characteristics’ bundles. The form was distributed to, and collected back from, a

sample of 72 respondents selected by a multi-stage random sampling procedure

from consumers at the eleven international hotels on the Gold Coast. With the aid

of front-office managers at hotels, the stages in sampling were:

• selection of three (3) from eleven hotels by drawing cards

• selection of three (3) days at random from a three-month period by drawing

cards

• respondents selected systematically, from every tenth guest to call at the

reception desk on the selected days.

Analysis was completed by a Conjoint Analyzer program (Bretton-Clark 1990),

and the results are given in Appendix 13. All coefficients were significant at a

95% level of confidence, and the coefficients of the quantitative characteristics

possessed the expected signs. The individual and group Relative Importance (RI)

measures did not differ significantly for any characteristic, indicating that the

group was homogeneous and that there was no likelihood of aggregation error in

group utility functions.


The resulting part-worth values for each characteristic, expressed in units of the

rating scale used (1-20), are shown in Figures 6.1, 6.2 and 6.3.

Figure 6.1 Utility function for access to shops / centre

Figure 6.2 Utility function for access to the beach


Figure 6.3 Utility function for the view from a hotel room

From Figure 6.1 it is apparent that changes in the location of hotel

accommodation with respect to distance from the shopping and entertainment

centre of the Gold Coast do not possess a constant marginal value. The plot

suggests that in moving from the centre to a location which is quieter and a short

distance from the centre produces an increased utility, but that in moving further

away marginal utility declines and becomes negative. This concurs with the

findings of Sinclair et al. (1990) in southern Spain, noted in section 5.5.3.

Increasing distance from the beach, represented in Figure 6.2, shows a constant

decline in utility which may be linear or may suggest an inverse relationship

where (negative) marginal utility is high for an immediate shift from beachfront

to a close non-beachfront location, but declines as distance increases to a point

where consumers may be indifferent between a location remote from the beach

and one slightly more remote. This is a similar result to that found, in a

geographically linear context, for the location of motels in Ballina, NSW with

respect to the destination centre (Bull 1994).

Although the values for VIEW presented in Figure 6.3 are categorical, there is

some ordinality in the extent and nature of preferred views, with a higher

preference for ‘more’ views which may be linear or increasing exponentially.

This suggests that some form of a scaled variable may be constructed for the

hedonic analysis.


In this conjoint analysis, all three locational characteristics had a high level of

relative importance to consumers, especially when compared with PRICE, adding

further weight to the notion of their determinance as differentiating

characteristics in consumer decision making. The analysis also demonstrated that

marginal implicit valuations, especially for access characteristics, may not be

linear, and indicated some directions for the choice of functional form for the

hedonic analysis, in parallel with the discussion of nonlinear consumption

technology in section 4.2.1 and that of Ladd & Zober (1977).

6.5 Hedonic price estimation

6.5.1 Data

As a result of the above analyses, it was possible to develop a specification for an

empirical test of the hedonic model given in equation 6.1 above. Firstly, the

variables were defined from content and qualitative investigation (described in

sections 6.3.2 and 6.3.1 respectively), as well as the factor analytic and conjoint

analytic procedures (described in sections 6.3.3 and 6.4 respectively).

The choice of dependent variable was between room rates published in hotel

brochures (rack rates) and rates actually charged. Rack rates are increasingly

being treated by suppliers only as guide price maxima, and are rarely enforced

unless a computerised yield management system is in operation and a hotel is

close to full occupancy. In fact one hotel in the sample did not identify or publish

rack rates at all. Actual rates incorporate discounts for group bookings, various

promotions, ad hoc bargaining and the output of yield management systems.

Therefore the dependent variable P(zi) was defined as the average daily room rate

(ADR) for a room of a particular type i in one of the international standard hotels

on the Gold Coast. The value of ADR is a weighted average of rates charged by

rooms sold at those rates, and can be expressed for any given time period.


Fixed characteristics z z zf1 2, .... were defined from the factor analysis and

conjoint analysis as three differentiating locational characteristics of place-

sensitive products. They were:

1. Distance of hotel room type i from the beach, in minutes. The 'beach' was

defined as ocean beach fronting the Pacific (Coral Sea), and distance was

defined as access by the simplest and most direct route and means. Some

hotels geographically located further from the beach offer a free minibus

service, whilst for most hotels pedestrian access is the obvious method.

2. Distance of hotel room i from the shopping and entertainment centre of

Surfers Paradise CBD (Cavill Avenue), in minutes. At the beginning of the

period of this study, hotel managers and tourism information staff generally

regarded Surfers Paradise as the core tourist zone, as defined in section 2.4.3

(although more recently destination growth has been seen to cause

fragmentation into a number of cores, including Broadbeach and the Marina

Mirage area). Again, access was measured by the simplest means.

3. The extent and type of the view from windows of hotel room i. Following the

conjoint analysis results for VIEW, this variable was recast as a one-to-ten

rating scale representing an aggregation of view quality and view extent.

The main variable differentiating characteristics z z zf f s{ } { }, ....+ +1 2 found from

the factor analysis were quality of room service and quality of staff. Because of

the difficulty of measurement, a single proxy variable was employed to cover

both of these characteristics. This represents ‘extra service quality’ at hotel room

i, and is a simple scale variable increasing by one (1) unit per 'half-star' extra

rating (NRMA) above the base 'four-star' level required within study definitions.

This variable should also capture any differences in quality of room furnishings

and fittings.

In addition, three dummy variables were included to represent quarterly seasonal

variations in patterns of prices, as it was possible that characteristics may be

valued differently by consuming tourists at different times of year. These

variables were:


S1 = season 1, dummy variable = 1 for December quarter, 0

otherwise

S2 = season 2, " = 1 for March "

S3 = season 3, " = 1 for June "

Pricing data was available covering 26 room types (i = 1 to 26), spread across the

eleven hotels on the Gold Coast (see Appendix 3). This data was obtained

directly from hotel management by personal interview and analysis of records,

and was averaged by quarter. Two years’ data were examined (quarter 3, 1992 to

quarter 2, 1994), and N therefore = 208. All room types, location characteristics

and star ratings were constant during the study period. Room type details were

confirmed from hotel brochures and personal interviews with hotel managers,

locational characteristics were measured by personal observation, and star ratings

were confirmed from the Gold Coast Visitors and Convention Bureau, NRMA

and RACQ listings.

6.5.2 Model specifications

The choice of functional form for hedonic models has received some attention in

the literature (Cassel & Mendelsohn 1985; Cropper et al. 1988; Halvorsen &

Pollakowski 1981). Most writers agree that theoretical consistency is important

for calculation of marginal implicit prices for each characteristic, and that in the

absence of any evidence to the contrary, additive models may be preferred to

those incorporating some form of interactions between characteristics.

Halvorsen & Pollakowski (1981) suggest a flexible functional form, based on

Box-Cox transformations (Box & Cox 1964), in order to avoid imposing

theoretically unwarranted restrictions. The Box-Cox method has however been

criticised for placing restrictions on functional form and for making the

interpretation of parameters difficult (Can 1990), and the more recent papers on

hedonic models have tended to support the a priori selection of functional form

based on hypothesised theoretical relationships. Simpler forms are preferred for

more straightforward calculation and explicit interpretation of parameters.


Following the utility functions derived from the conjoint analysis in section 6.4

above, it was hypothesised that the contributions to P(zi) of views and overall

quality were likely to be linear, and with positive coefficients. Whilst the conjoint

analysis showed a potentially exponential relationship between utility and views

from rooms, the rating scale for rooms did not provide a sufficiently robust

continuous variable to support the more complex parametric estimations that an

exponential form demands, and the linear form provided a good alternative. It

was hypothesised that the contribution of distance from the beach was either

linear, with a negative coefficient, or could be expressed by an inverse functional

form; the utility of distance from the core tourist centre was clearly non-linear,

and the analysis from section 6.4 together with the findings of Sinclair et al.

(1990) and Jud & Winkler (1991) suggested that a quadratic form was

appropriate. It is recognised that the quadratic form offers only a limited domain

of applicability; this issue is addressed in Chapter 7.

The hedonic price function given in equation (6.1), which is repeated here:

P z P z z z z z zf f f s( ) ( , .... , , .... ){ } { }= + +1 2 1 2 (6.1)

was then operationalised with two alternative functional forms, one treating the

contribution of the ‘distance from the beach’ variable as linear, the other with an

inverse function for this variable. The empirical models are defined in equations

(6.2) and (6.3).

Model A

P z z z z z z S S S ui f ii i i i i( ) ( )= + + + + + + + + ++β β β β β β β β β0 1 1 2 2 3 2 4 3 5 1 6 1 7 2 8 32

(6.2)

Model B

P z z z z z z S S S ui f ii i i i i( ) / ( )= + + + + + + + + ++β β β β β β β β β0 1 1 2 2 3 2 4 3 5 1 6 1 7 2 8 32

(6.3)


where:

P(zi) = average daily room rate in room type i (PRICEADR)

z i1 = distance of room type i from the beach in minutes (BEACH)

z i2 = distance of room type i from the tourist and shopping centre in minutes

(CENTRE)

z i3 = extent and type of the view from windows of hotel room i (VIEW)

z f i( )+ 1 = service quality at hotel room i (QUALITY)

S1, S2 and S3 = dummy variables for December, March and June quarters

respectively

Estimations for equations (6.2) and (6.3) were made using the Statistica computer

software programs (StatSoft Inc. 1993) for data manipulation, multiple regression

and residual analysis. Standard OLS regression was used, with the objectives of

creating a model with predictive ability and the regression coefficients having the

expected signs. The previous, somewhat complex, procedures in sections 6.3 and

6.4 to provide a parsimonious specification of variables reduced the need for a

Lagrange Multiplier or Ramsey RESET test to assess the value of including

further variables.

6.6 Conclusion

This chapter has described and analysed a sequential methodology by which to

determine the specific locational and other characteristics for the empirical

valuation model. Determinant characteristics were identified both as ‘offer’

characteristics, through qualitative in-depth interviews with suppliers and

through promotional literature, and ‘bid’ characteristics, through a consumer

survey and factor analytic procedure.

The theoretical utility functions for characteristics were examined and

determined through a conjoint analysis, which provided a guide and form for the


empirical test of the hedonic model. Two possible specifications were produced.

The analysis of the data and the findings are described in Chapter 7, which leads

to a discussion of the results in the context of an oligopolistic market for place-

sensitive products.

Results of the empirical study 129

Chapter 7. Results of the empirical study

7.1 Introduction

This chapter contains the results of the empirical investigation of the hedonic

price analysis of hotel room rates on the Gold Coast. It identifies and examines

the implicit price of each (variable and fixed) characteristic, and discusses their

meaning in the context of market clearing. It is argued that despite the lack of

specific demand-side variables in the equation, the implicit characteristic prices

are generally representative of bid prices in this specific market.

The implications for assessing the implicit marginal costs for supplying

locational characteristics in an oligopolistic market for place-sensitive products

are then considered. A single price is identified to incorporate all fixed

characteristics differentials for each place-sensitive product, and this price

represents an equilibrium position incorporating both the joint utility to the

consumer of a bundle of characteristics that is differentiated from a mean

position and the implicit differential cost to the producer.

An additional hypothesis is tested, that ‘underpricing’ and ‘overpricing’,

expressed as the residuals between actual and predicted hotel room prices, are

associated with higher or lower individual levels of short-run demand for

accommodation, expressed as variations from mean occupancy rates for the

market.

7.2 Multiple regression analysis

7.2.1 Initial analysis

An initial inspection of scatter diagrams and regression analysis of equations

(6.2) and (6.3) showed that the coefficients of the seasonal dummy variables S1,

S2 and S3 were far from significant. The data were therefore recast into the mean


values of the four ‘winter’ quarters (June and September quarters) and of the four

‘summer’ quarters (December and March quarters). This reduced the number of

observations to 52. A single dummy variable S1 was maintained and redefined so

that:

S1 = season 1, dummy variable = 1 for summer halfyear,

= 0 otherwise

This therefore reduced the number of independent variables (k) to six, and

reduced the degrees of freedom (n-k-1) to 45, still a relatively acceptable figure.

Examination of individual scatter diagrams confirmed that the relationships

between room rates (PRICEADR) and the location-characteristics variables

(BEACH and CENTRE) were likely to be as hypothesised, and so the models

defined in equations (6.2) and (6.3) were redefined with the same functional

forms but with two fewer dummy variables, into equations (7.1) and (7.2):

P z z z z z z S ui f ii i i i i( ) ( )= + + + + + + ++β β β β β β β0 1 1 2 2 3 2 4 3 5 1 6 12 (7.1)

P z z z z z z S ui f ii i i i i( ) / ( )= + + + + + + ++β β β β β β β0 1 1 2 2 3 2 4 3 5 1 6 12 (7.2)

The primary results for the two models are shown in Table 7.1.


Table 7.1 Basic results of multiple regressions: overall fit and parameter

estimates

Model A

R= .70632752 R²= .49889856 Adjusted R²= .43208504

F(6,45)=7.4670 p<.00001 Std.Error of estimate: 33.264

Parameter Std Error

estimate of estimate t(45) p-level

Intercpt 83.20918 23.78187 3.49885 .001065

BEACH -3.19352 1.41390 -2.25866 .028798

VIEW 3.25966 2.36757 1.37680 .175386

QUALITY 19.56879 6.04806 3.23555 .002279

S1 11.92308 9.22586 1.29235 .202831

CENTRE 5.33681 3.70686 1.43971 .156870

CPSQR* -.12765 .15026 -.84952 .400087

*CPSQR defined as the square of CENTRE

Model B

R= .87483610 R²= .76533821 Adjusted R²= .73404997

F(6,45)=24.461 p<.00000 Std.Error of estimate: 22.763

Parameter Std. Error

estimate of estimate t(45) p-level

Intercpt 41.4118 16.61232 2.49284 .016420

VIEW 4.0768 1.62386 2.51053 .015717

QUALITY 10.4792 4.32170 2.42480 .019395

S1 11.9231 6.31342 1.88853 .065411

IBEACH* 152.4451 19.36245 7.87324 .000000

CENTRE 5.4330 2.51679 2.15869 .036245

CPSQR -.1523 .10058 -1.51437 .136926

*For simplicity IBEACH was directly defined in the analysis as the reciprocal of BEACH

Inspection of Table 7.1 demonstrates the superiority of model B, using the

inverse functional form for the distance from the beach variable. The overall


corrected value of R2 improves from 0.432 to 0.734, and the F-value of model B

is three times as high as that of model A. In model B, the t-values of all

explanatory variables are higher, with the exception of that for QUALITY. The

likely explanation is that in model A, the QUALITY variable captured some of

the variation which was more properly due to the inverse function version of the

BEACH variable, although the correlation between QUALITY and BEACH is

not significant.

Model B was therefore selected as the better model, on both theoretical and

statistical grounds. In this model, about three quarters of the variation in prices

between hotel rooms sold was accounted for by differences in the characteristics

included in the model.

Diagnostic tests for this model were undertaken. Tolerance tests for

multicollinearity, shown in Table 7.2, produced high values almost throughout,

indicating no significant redundancy in the variables. The exceptions were the

low values for CENTRE and its square CPSQR, which are of course highly

correlated with each other (r = 0.95). The tolerance level for CENTRE is 0.5205

if CPSQR is removed from the equation.

Table 7.2 Multicollinearity: tolerance tests

Tolerance

VIEW .681584

QUALITY .486732

S1 1.000000

IBEACH .795309

CENTRE .064511

CPSQR .081181

However, to maintain the specification of the model, CPSQR was kept, as the

multicollinearity was not severe, with t-scores and estimation of orthogonal

variables not significantly altered.


Heteroscedasticity did not appear to be a problem with the sample; a Breusch-

Pagan test yielded L = 3.61 (below the .05 critical value of 11.07 with 5 d/f).

Similarly, the value of the Durbin-Watson statistic was d = 1.666, which was

well within the .05 critical value range of 1.26 - 1.87 (n = 52 and k′ = 7), so it

was concluded that there was no evidence of autocorrelation amongst the

residuals.

The diagnostic tests did not therefore provide significant evidence to refute the

assumption that OLS estimates were reliable and unbiased.

7.2.2 Analysis of parameter estimates

In the chosen model, the parameter estimates of all variables were significant at a

95% level, with the exceptions of that for the dummy seasonal variable S1, which

marginally fails to be significant at this level, and of that for CPSQR, the square

of distance from the tourist and shopping centre. All parameter estimates were of

the expected signs.

To investigate whether it was possible to improve upon the binomial functional

form for the fit of the ‘distance from the tourist centre’ variable, the analysis was

rerun as piecewise regression in relation to the CENTRE variable, with CPSQR

replaced by a dummy variable Di, such that:

Di = 1 if z i2 > threshold value

= 0 otherwise

Inspection of the scatter diagram allowed the threshold value to be posited as z i2

= 10. However, there was no specific theoretical explanation for this formulation,

and whilst the parameter estimate for the dummy Di was of the correct sign, it

was smaller in absolute value than the estimate for z i2 . The piecewise regression

was therefore rejected in favour of the existing binomial form. Further alternative


forms had already been considered as theoretically and practically unsuitable (see

chapter 6).

The parameter estimates obtained in Model B were therefore accepted as being

the best estimates available.

7.3 Interpretation of the results of the empirical test

The hedonic model tested included the contributions to the price of a place-

sensitive product of valuations of three fixed characteristics zi , one ‘variable’

characteristic z(f+1), and a seasonal dummy variable S1. The implicit marginal

price of each characteristic was then obtained by differentiation of the hedonic

price equation with respect to that characteristic.

The mean values of each characteristic for the sample obtained from the data are

shown in Table 7.3.

Table 7.3 Mean values for variables in the empirical study

Mean

PRICEADR 148.1154

BEACH 6.6154

(IBEACH 0.2048)

VIEW 5.6154

QUALITY 1.5000

CENTRE 8.3077

7.3.1 Implicit prices of variable characteristics

For the variable characteristic QUALITY as well as for the seasonal dummy, the

marginal implicit prices were the same as the parameter estimates, since the form

was linear, and:


dP zdz

i

f i

( )( )+

=1

5β and dP z

dSi( )

16= β

Thus the marginal implicit price for a hotel room night during summer was a

premium of $11.92 over that for an identical room night during the winter

season. This reflects the relatively higher importance of the summer period as the

main tourist season on the Gold Coast. The implicit price is not high, however,

which confirms the dampening of the normal seasonal cycle during the period

studied due to the general downturn in the Australian economy during 1993.

The implicit price for an additional unit of quality, which was represented here as

each additional ‘half-star’ rating of hotels, was $10.48. Thus a standard full 5-star

hotel room should have commanded a premium, cet. par., of $20.96 per night

over a 4-star hotel room. Since quality was specified as a characteristic that could

be supplied in varying amounts by hoteliers, including room service, quality of

room furnishings and fittings, and general in-hotel services, the implicit price

should represent an equilibrium market-clearing position where the marginal cost

to hoteliers of providing the extra unit of quality should equate to the marginal

revenue that can be obtained from tourist-consumers. This makes the assumption,

which is realistic in the international hotel industry, that there is no restriction on

trade in such elements of quality, and that the provision of service and room

quality is freely competitive.

There is modest support in the empirical literature that hotel quality and price are

directly linked in this way. Hartman (1989) and Overstreet (1993) find that room

service and hotel facilities are directly linked to higher rates, and Carvell &

Herrin (1990) obtain specific implicit price estimates for the provision of

concierges, valet dry cleaning and increased star ratings in hotels. All of these

papers describe market-clearing price estimates, and not simply consumer or

producer valuations.


7.3.2 Implicit prices of fixed characteristics

As with QUALITY, the linear form of the function provided a constant implicit

price of the VIEW characteristic, since:

dP zdz

i

i

( )3

4= β

Since VIEW was specified as a one-to-ten rating scale, the marginal price of an

additional point on the rating scale was estimated at $4.08. Therefore the implicit

price of an average view (from Table 7.3, mean = 5.6154) was $22.91 per room

night. However, this would represent a theoretical premium over a room with no

view whatsoever, and implicit valuations are better thought of as differences

from the mean, representing price premia or discounts for better or lesser views

than a ‘typical’ one.

Given the inverse function specified to represent the partial effect on room rates

of hotel room distances from the beach, the marginal implicit price varies over

distance. The partial derivative with respect to BEACH ( z i1 ) is:

dP zdz z

i

i i

( )1

11

12= −β

Thus the marginal implicit price of the first minute’s move away from the beach

was a negative of $152.45, which is better expressed by stating that a beachfront

room commands a premium of $152.45 over a room situated one minute away.

However, the marginal implicit prices of further moves away from the beach

decline swiftly in absolute terms. This caused the total implicit price of a room

location at two minute’s distance from the beach to be $76.22, and at the mean

distance from the beach of 6.6 minutes, the total implicit price was $23.20 with a

marginal price reduction for a further extra minute’s travel of only $3.50. Figure

7.1 demonstrates the change in estimated total price over changing distances.


Figure 7.1 Implicit price of distance from the beach

Total implicit price of distance from the beach

Distance in minutes

Estim

ated

tota

l pric

e ($

)

��

��

��

��

��

��

��

��

��

��

-20

20

60

100

140

180

0 5 10 15 20

Figure 7.1 reflects similarity to the utility function generated from the conjoint

analysis in Figure 6.2. The nature of the changing valuation also corresponds

with the findings in studies such those of Arbel & Pizam (1977) and Wall et al.

(1985), which indicate a marked increase in consumer utility for hotel

accommodation very close to perceived attractions, but relative indifference

between similar properties situated some distance, and some greater distance,

away from the attractions. Similarly, in their discrete choice experiment, Haider

& Ewing (1990) report a sharp drop in utility for tourist accommodation situated

a short way from a (hypothetical) Caribbean beach, but then a slower diminution

in utility given a further increase in distance (Haider & Ewing 1990: 40).

The marginal implicit price of changes in hotel rooms’ distance from the tourist

and shopping centre can be found by differentiating both terms of the quadratic

hedonic, such that:

dP zdz

zi

i

i( )

22 3 22= +β β

Thus at a mean distance of 8.3 minutes from the centre, the utility or total

implicit price of the characteristic was $34.90 and the marginal implicit price of


moving one minute further away was estimated at $2.90. In comparison, at one

minute from the centre a total price of $5.28 was found for the CENTRE

characteristic, and a marginal price estimate of $5.13 was found for a similar

move one minute further away, indicating a higher marginal utility placed on

putting distance between accommodation and a possibly noisy or congested

tourist centre; but at 20 minutes distance, the total valuation was $47.74 and the

marginal implicit price of a further minute away was a reduction of 68c. Marginal

implicit price was zero (and hence the maximum total valuation occurred) at

about 17 minutes distance for the CENTRE characteristic.

In Figure 7.2, the overall characteristic’s total price function for CENTRE and

marginal implicit prices of various distances from the tourist and shopping centre

are shown. Once again, the total price function in Figure 7.2 reflects a similarity

to the utility function, resulting from the previous conjoint analysis, that was

shown in Figure 6.1.

Figure 7.2 Implicit price of distance from the tourist centre

Valuation, and estimated marginal implicit pricesof distance from the tourist centre

Distance in minutes

Pric

e in

$

��

��

��

��

��

��

��

��

��

��

��

-5

5

15

25

35

45

55

1 6 11 16 21

Characteristic's total

Implicit marginal price

price function

This result concurs with the types of finding in Haider & Ewing (1990) and

Sinclair et al. (1990) on nonmonotonic location preferences for holiday

accommodation in relation to busy resort centres. Those findings seem to reflect

both tourist utility and the original site selection choices by producers, which may


have been undertaken through ad hoc development or may have used formal

tourism site selection preocedures such as LOCAT (Moutinho & Paton 1991).

A limitation of the analysis of the CENTRE characteristic is the limited domain

of applicability of a quadratic functional form. The chosen form provides a good

fit over the sample range, and values of the characteristic cannot be negative, thus

ensuring a lower boundary. However, there is no similar technical upper

boundary to values of the characteristic, and the quadratic form in particular

could produce large errors if it is used incorrectly in out-of-sample predictions.

Within the context of place-sensitive products for tourism, it was shown in

section 3.4.1 that a consumer’s ultimate decision set is likely to be limited to the

destination as a specific geographical area of supply, and this is likely to ensure a

reasonable physical definition of market boundaries. Under this condition, there

is evidence for some upper boundary to values of any distance characteristic, and

hence the need to consider any out-of-sample predictions is remote.

7.4 Interpretation of implicit prices for location and other fixed

characteristics

In sections 5.5.2 and 5.6 it was shown that the identification problem which is

inherent in hedonic models, that implicit prices may be determined

simultaneously as bid and offer prices, is likely to be eased considerably in the

case of fixed characteristics since supply is highly inelastic. Virtually all place-

sensitive products have a de facto maximum supply or usage level determined by

some form of carrying capacity, and in commercial markets for these products

suppliers with high fixed costs of production rely on high usage levels for their

profitability. In the hotel industry, it was shown that owing to the nature of cost

structures, hoteliers will normally maximise profits by seeking to operate at an

optimum capacity (Lovelock 1992b) near to full capacity (Bull 1991; Relihan

1989). In this situation, supply may be regarded as being determined exogenously


to the hedonic model, which then generates implicit prices based on demand

variation.

The implicit prices thus represent equilibrium marginal offer prices, which also

represent the implicit differentials between costs of the fixed characteristics.

Using the hedonic price equation 7.2 it is then possible to estimate the average

revenue from product differentiation by any set of fixed characteristics supplied.

For any one supplier i, the specific bundle of fixed characteristics offered within

a product such as a roomnight in a hotel represents a monopolistic position where

the bundle has a total implicit offer price that will differ from the implicit offer

price of a ‘mean’ bundle. Let this variation be the fixed characteristics

differential price (FCDPi). If there are f fixed characteristics zk (k = 1 to f)

within the bundle, then for producer i:

FCDP z zi kk

f

k kk

f

ki== =

∑ ∑−β β1 1

! (7.3)

where !zk = the mean value of zk

From the empirical study, a hotelier offering, for example, a room where:

VIEW = 7

BEACH = 2

CENTRE = 6

would face an FCDP of: $151.82 - $81.01 = $70.81

On the other hand, a supplier offering a room where:

VIEW = 4

BEACH = 15

CENTRE = 20

would face an FCDP of: $74.12 - $81.01 = -$6.89

The FCDP values represent the market valuations for bundles of locational and

other fixed characteristics in terms of product differentiation from a ‘mean’


bundle. Whilst the hedonic analysis has identified implicit prices for each

individual fixed (and variable) characteristic, the merit in identifying a single

FCDP, through equation 7.3, for the complete bundle of fixed characteristics is

that a single implicit cost and differentiation premium or discount is developed

for each aggregate location. For a producer in the current short run, any FCDP

may represent economic rent associated with its monopolistic position. This

finding is strongly supported by Osborne & Smith (1996) who find evidence in

holiday property rental markets that fixed locational characteristics are a

significant source of a firm’s ability to exercise market power.

In this situation, oligopolistic producers are likely to compete with each other on

overall prices, given essentially fixed supply capacities and variable demand, or

to trade on product differentiation by changing the variable characteristics whose

marginal cost and marginal revenue are more clearly identifiable (Porter 1985). In

the empirical study, the latter approach implies a variation of the elements of

physical fittings and service (QUALITY). As shown in section 3.2.4, either

approach is consistent with Bertrand-Edgeworth-type decision making, and

tallies with the qualitative descriptions summarised in section 6.3.1 of how hotel

managers approach short-run product and pricing decisions in practice. FCDP

values have been too difficult to work out and to incorporate into pricing practice

in any systematic way.

7.5 Underpricing and overpricing

7.5.1 Residuals and occupancy rates

The hedonic model describes an equilibrium position for the joint set of bid and

offer functions for product characteristics. The model may then in a limited way

be used to predict an equilibrium price for each product P(zi). The limitations

include the assumption that consumers are still willing to trade off ‘more’ of one

characteristic for ‘less’ of another, the problem that occurs in time series hedonic

analyses that changes in prices and characteristics qualities are both endogenous,


and the futility of predicting on the basis of senseless or illogical characteristics’

combinations (Bowbrick 1992).

These limitations do not on the whole impair the use of the model to predict

estimated prices for the existing set of hotel rooms in the empirical study.

Predictions of hedonic equilibrium room rates were therefore made using the

model from equation 7.2, for each of the 52 cases. It was postulated that the

residuals, the differences between these predicted prices and actual ADR

charged, reflect individual suppliers’ pricing decisions which may lead to

‘overpricing’ or ‘underpricing’ their differentiated products in comparison to

hedonic equilibrium valuations. It was not hypothesised whether any over- or

underpricing is deliberate or unwitting.

If it is assumed that the market for Gold Coast hotel accommodation was broadly

in a partial equilibrium as averaged during the period of study, then an

equilibrium level of quantity can be represented by the average occupancy rate,

where the occupancy rate during any time period is represented by:

roomnights filled x 100

roomnights available

This measure is room occupancy, and is more commonly used than the measure

of bed occupancy, which also takes into consideration the number of guests

accommodated per room. The use of room occupancy as the test variable

maintains compatibility with the variables designated in section 6.2.

During the study period, the market mean for room occupancy in international-

standard hotels on the Gold Coast averaged 74% during the summer and 68%

during the winter (Horwath and Horwath Qld Pty Ltd 1993). It was hypothesised

that ‘underpricing’ by individual suppliers results in individual occupancy rates

greater than the market mean, whilst ‘overpricing’ results in rates lower than the

market mean.

Occupancy rates for individual hotels were collected from managers and analysis

of records at the same time as pricing data was collected. A limitation was that,


with one exception, it was only possible to obtain occupancy rates for each hotel

overall rather than for specific room types, so that there was some loss of

accuracy. Nevertheless, variations in location and quality between suppliers were

embodied. The hypothesis was tested by simple product-moment correlation

between occupancy rates and the price residuals from the hedonic model, with

the assumption that the impact on occupancy rates of price variations took place

within the same time period (six months).

The result of the test was a correlation of r = -.7451 (t = -7.9, n = 52)

which was significant at better than 99%. A scatter diagram is shown in Figure

7.3. From this test it was possible to reject the null hypothesis, and conclude that

there is some significant negative relationship between over- or underpricing and

occupancy.

Figure 7.3 Hotel occupancy rates and roomrate pricing residuals

The relationship between hotel occupancy ratesand roomrate pricing residuals

Residual between actual and predicted roomrates ($)

Occ

upan

cy ra

te (%

)

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��

��

��

��

��

��

��

��

��

��

��

ast ah asu

cl chccb

gcl gco

hsthrc

m

pst pp pcph

r6r25 r35rps rph

swn

sml

tsttq

ast asu

cl chccbgcl gco

hsthrc m

pstpp pcph r6r25 r35rps rph

swn

sml

40

50

60

70

80

90

100

-50 -30 -10 10 30 50

In Figure 7.3, hotels and room types are identified by labels relating to the

suppliers in Appendix 3. Each type appears twice, one observation each for the

summer and winter period averages. The test does not provide sufficient evidence

to conclude that producers who overprice cause occupancy rates to fall (and vice


versa for underpricing), since price and quantity values are interdependent. The

test does however provide evidence of strong association and individual

deviation from hedonically-identified market equilibrium.

It is accepted that this is a short-run position that is unlikely to remain stable, as

producers adjust overall prices and promotion to influence individual demand

and market share. This is increasingly happening more quickly in the hotel

industry as producers develop more sophisticated yield management systems and

demand fluctuates more widely through extraneous factors such as seasonal

tourism patterns.

7.5.2 FCDP and occupancy rates

To ensure that the results from the previous test were not biased from the effects

of differing levels of fixed characteristics, a further test was performed to search

for any association between occupancy rates and fixed characteristics differential

prices. The FCDP variable was used both in its own right and as a proxy for the

quantities of fixed characteristics. Once again, the test used was simple product-

moment correlation.

The result of the test was a correlation of r = 0.2730 (t = 2.01, n =

52) which was not significant at 95%. Therefore the null hypothessis was

accepted, that there was no significant evidence of association between ‘more

valuable’ bundles of fixed characteristics and occupancy rates. This indicated that

consumers are not drawn per se to place-sensitive products offering higher

locational characteristics’ value without considering price, and confirming that

price, quantity of fixed characteristics and utility from those characteristics are

interdependent.

7.6 Conclusion

The empirical investigation has been used to demonstrate that it is possible to

identify the implicit marginal and total prices of characteristics that contribute to


product differentiation in an oligopolistic market for place-sensitive products. In

particular, whilst suppliers may be able to fix prices in relation to changes in the

provision of variable characteristics, such as service quality, so that the marginal

revenue obtained from the changed characteristic equals the marginal cost of its

provision, they cannot do this individually for fixed characteristics such as

location. However, the empirical analysis shows that it is possible to price fixed

differentiating characteristics between suppliers in such a way as to demonstrate

the economic rent that is feasible under short-run equilibrium conditions. In the

specific case analysed, the analysis has successfully identified prices of such

characteristics as distance from a beach or town centre (access characteristics),

and extent of a view (an endogenous neighbourhood characteristic).

The analysis has discussed the meaning of the implicit prices of fixed

differentiating characteristics in the context of market clearing, and has assessed

how such implicit prices relate to the ‘supply’ of locational characteristics in an

oligopolistic market.

By summing the implicit prices for fixed characteristics into a single fixed

characteristics differential price (FCDP), it has been possible to move towards a

tentative estimate of the implicit equilibrium price for a particular bundle of fixed

characteristics. It has been shown in addition that variations from an implicit

equilibrium price position are associated with individual variations in hotel

accommodation demand around a market mean level, where these price

variations cannot be accounted for by product differences. Whilst such a range of

variations is unlikely to remain stable for long, the finding lends credence to the

importance for suppliers of estimating accurately the implicit valuations of both

fixed and variable characteristics.

An outline of further potential extensions of this line of research is given in

Chapter 8, together with summative conclusions for the study as a whole.

Conclusions, and directions for future research 146

Chapter 8. Conclusions, and directions for

future research

8.1 Introduction

This concluding chapter begins with a summary of the work, discussion and

findings within this study, together with observations on the methods used. It

acknowledges the difficulties of conducting a study that transcends some

established academic discipline boundaries.

There follows a discussion of the study’s implications for theory, policy and

practice. The results provide a specific contribution to the study of differentiated

oligopoly and to producers’ strategic decision making on prices and competitive

positions in the short run. What it was not possible to include in the study was the

analyses of:

(a) strategic interdependence amongst firms, and long-term adjustments

to prices and competitive positions as a result of shifts in demand, changes in the

utility of fixed characteristics, and market entry and exit

(b) implications for land valuation and planning, and for investment

feasibility decisions by potential new entrants to the market.

The chapter provides some indicators for further research that would be valuable

in these areas.

8.2 Summary of the study

8.2.1 Scope of the study

This study has investigated the role of location and other fixed characteristics of

some products as product-differentiating characteristics within the theoretical

bases of oligopoly and service-producer location. It has concentrated on location,

which is both an input to production and an essential element of some products,


which are defined here as place-sensitive products. Place-sensitive products are

defined in chapters 1 and 2, and are found to be mostly services such as

recreational services and accommodation.

The specific market selected for empirical study is the market for hotel

accommodation. The product incorporates the properties of place-sensitivity, is in

continuous supply, and is produced by a limited number of firms operating with

normal profit objectives. Supply continuity and commercial provision set this

investigation apart from those that study, for example, housing (property

purchase and sale) markets where supply is neither continuous nor in the hands of

commercial firms, or public goods where there are no commercial transactions.

8.2.2 Summary of findings

The first part of this study determines the nature of place-sensitive products, the

market structure in which they are likely to be supplied, and an analysis of their

demand. It is shown in chapter 3 that where place-sensitive products incorporate

both location-specific and other elements, the market structure that is most likely

to exist to supply them is differentiated oligopoly. This is due to the existence of

sunk costs incurred in developing production at specific locations together with

balkanised markets where competition is geographically local, since more remote

locations provide poor substitutes. In addition, dependence on specific locations

for production and consumption to take place together implies capacity

constraints. It is shown that the hotel industry provides a good example of

differentiated oligopoly with capacity constraints. Using characteristics theory,

chapter 4 identifies those fixed locational components of place-sensitive products

that have been found to be determinant in consumer demand, and specifically

those that relate to the selection of hotel accommodation by tourists.

The second part of this study develops a model for identifying and evaluating

locational characteristics and their contribution to the pricing of place-sensitive

products. The central formal model, developed in section 5.6, is a variation of

hedonic price models that separates fixed characteristics from variable

characteristics. It demonstrates that for characteristics whose level can be varied


by suppliers, hedonic price equations can be used to derive implicit equilibrium

characteristics’ prices where the marginal cost and marginal revenue are equal.

However, for fixed characteristics the hedonic model estimates implicit prices

across suppliers, since marginal cost is shown to be zero. It is also shown, in

chapters 5 and 6, that these prices are bid prices, in the context of fixed capacity

constraints and pricing strategies based on the total product.

The model is empirically tested in chapters 6 and 7. A three-stage methodology is

used to develop the appropriate variables and the functional form; there is more

consideration of this in section 8.2.3. The test uses the market for international-

standard hotel accommodation on the Gold Coast to provide data, and sections

3.4.4, 4.5 and 6.2 define and describe this market. The hedonic model produces

significant parameter estimates for all characteristics except the squared term of

the binomial form used for the characteristic measuring distance from the centre

of Surfers Paradise. However, an argument for retaining this term is presented in

section 7.2. From the model, implicit marginal prices are derived for three fixed

characteristics and one variable characteristic, and chapter 7 contains a discussion

of the valuations obtained for different levels of each characteristic. Finally, it is

shown in the same chapter that where firms’ actual prices for hotel

accommodation vary significantly above (or below) their predicted equilibrium

price, their individual occupancy rates are likely to be below (or above) the

market mean.

8.2.3 Observations on methodology

Although this study is based primarily in a microeconomic paradigm, it has

attempted to incorporate theory and research methods from other disciplines

where appropriate. Specifically, these include marketing, and hospitality and

tourism behaviour studies (although as noted in chapter 1, geographers too have

their own approaches to the type of topic in this study). Whilst it is felt that the

use of theory and research methods from more than one discipline is justified in

order to provide robust data and to provide checks on validity, it is recognised

that the disciplines have different terms for and approaches to the same areas. So

whilst avoiding the mixing of paradigms, where possible the terminology and


methods relating to each discipline have been employed in that part of the study

to which each relates.

The possible alternative research methods, which emanate largely from different

disciplines, are discussed in chapter 5. For the empirical tests, three main stages

of study were needed in sequence:

• the identification and determination of relevant product-differentiating

characteristics, in section 6.3 (which was undertaken by exploratory in-depth

interviews, content and factor analysis)

• the consumer valuation of utility and validation of functional form, in section

6.4 (undertaken by conjoint analysis)

• the estimation of implicit prices, in section 6.5 (effected by the hedonic

pricing model).

The issue of market boundaries is clearly important in assessing markets for

place-sensitive products, as is also that of homogeneity across market segments

in order to generate consistent utility values and comparisons. Sections 4.5.1 and

6.3.3 provide evidence that in this study the tourists staying in international-

standard Gold Coast hotels form a reasonably homogeneous group of consumers

with identical preferences, and it is assumed that this remained true throughout

all the stages of the study. However, it is recognised that whilst market

homogeneity was found here, it is not necessarily found elsewhere. For example,

resort hotels in countries such as Spain vary their service product and prices

markedly to cater for the different utility sets of tour operators’ groups,

convention delegates and other market segments (Bull 1991; Sinclair 1991).

Under these conditions, it would be necessary to construct separate models for

each distinct market segment, which would then involve consideration of firms’

differential and discriminatory pricing strategies. This development was not

necessary in the current study.

The investigation and the model used in this study should however be

generalisable to any market definable as a single market with place-sensitive


products, and where there are homogeneous utility functions for the

characteristics included. Here, the case of the market for international-standard

hotel accommodation on the Gold Coast was used to test the model, rather than

the model being particularly interpretive of the Gold Coast. It should therefore be

possible to replicate the study elsewhere.

8.3 Implications for producers of place-sensitive products operating

within differentiated oligopoly

8.3.1 Product design and pricing strategy

The implications for producers’ pricing strategies may be seen from equations 5.9

and 5.10 in chapter 5. The offer function in 5.10 allows the estimation of

marginal reservation prices for the variable characteristics zj but not for the fixed

characteristics zi . But the bid function in equation 5.9 includes all

characteristics, which allows the hedonic price function in equation 6.1 to

estimate implicit marginal costs for the fixed characteristics zi as well as for

variable characteristics zj. If producers treat this as real marginal costs, they are

then able to set prices under Bertrand-Edgeworth conditions where MR = MC for

every characteristic.

The relative importance of fixed characteristics within the total product cost and

utility will influence the extent to which producers may feel obliged to vary

product design, by changing the variable characteristics, in order to obtain

various levels of product differentiation. For example, a firm offering a product

that generates highly distinctive fixed characteristics with a strong contribution to

the product should find it relatively unnecessary to vary characteristics such as

service levels to any great extent, but it will promote its fixed locational

advantages to ensure it provides good market information in the consumer search

process. On the other hand, a firm whose product has few fixed characteristics

that are distinct from a market norm will need constantly to review and perhaps

change its variable characteristics to generate better differentiation. The relative

importance of a product’s bundle of fixed characteristics may be assessed by


comparing FCDP (fixed characteristics’ differential price) values, as developed

in section 7.4, with total product price.

It should then be possible to develop a model, which is not within the scope of

this study, for a producer to optimise product and pricing strategies in the

presence of a limited number of competitors with similarly differentiated

products. A potentially suitable model is that of Hartman (1989), which is also

based around hedonic pricing (with multiple products) and applied to the hotel

industry. Hartman’s model maximises profit from adjusting variable

characteristics (service levels and quality of fixtures and fittings) and setting

prices to compete with both higher-quality and lower-quality competitors, but

could extend to cover the case here.

Further possibilities for extending this analysis into general spatial competition

models are discussed briefly in section 8.3.3.

8.3.2 Are there equilibrium positions?

The implicit prices determined from the hedonic model form a locus of ex post

equilibrium positions that are short run and, in the case of characteristics in fixed

supply, representative of shifts in demand. But firms:

(a) do not have sufficient ex ante information to be able to predict

likely levels of these prices

(b) base their short-run pricing decisions on overall demand for their

products, as an aggregate of characteristics; in a sense, this is analogous to

enforced bundling where the characteristics as primitive goods cannot be sold

separately.

These two factors demonstrate that there is no market mechanism operating to

drive the implicit prices of characteristics, ex ante, towards an equilibrium

position. Any partial equilibrium position for the characteristics offered by a

single producer can only be a derived position, from that for the whole product

across the whole market.


However, it has been shown in chapter 3 that this type of market for place-

sensitive products is likely to operate as a differentiated oligopoly with capacity

constraints. This oligopoly will follow a Bertrand-Edgeworth position where each

producer’s capacity is limited, and the capacity limit (which is only a small

proportion of market demand) for each company means a price war to establish a

low price equilibrium is unrealistic. As soon as one firm is using all its capacity,

another can raise price. Therefore under these circumstances there is likely to be

no equilibrium but constant oscillation in the market. This can be validated

empirically by the manner in which producers of capacity-constrained

differentiated services such as hotel accommodation are turning to computerised

yield management systems. These systems update offer prices daily (Relihan

1989) based on short-run revenue optimisation, and contribute to the pattern of

continuous market oscillation.

8.3.3 Spatial competition strategy

With reference to producers who are differentiated oligopolists in Bertrand-

Edgeworth competition, the findings here could be incorporated into various

models of spatial competition. Tirole (1988) summarises a number of such

models. For example, following Gabszewicz et al. (1981), Salop (1979) and

Shaked & Sutton (1982) he shows that a Nash equilibrium can occur for both

horizontally and vertically differentiated producers in obtaining maximum profit

through maximising differentiation, and notes that this corresponds to the

recommendations made in most marketing texts (Tirole 1988 :286). Yet he notes

that where demand is physically concentrated rather than being evenly spread

across a spatial spectrum, there exists a force that can oppose maximal

differentiation.

These two contrasting effects can apply in the case of place-sensitive products.

The sum of the fixed location characteristics may represent physically

concentrated demand where the important variable is not distance from

consumers’ homes to the firms’ supply points but the varying utility of the set of

fixed characteristics contained in each product. In the case of Gold Coast hotels,


for example, demand may be concentrated, cet. par., around the most desirable

bundle of fixed characteristics, such as beach frontage, good views, and a

moderate distance from the tourist centre. Producers who are shown in the

current study to have already clustered at the set-up stage may wish to minimise

their apparent locational differentiation from this locational pole, but then

maximise differentiation on the other, variable, characteristics. Such contrasting

forces in differentiation fit well with the model of De Palma et al. (1985), in

which consumers derive both a spatial location surplus l and a separate product-

specific surplus s. As the balance between them changes such that s becomes

more important than l, product differentiation becomes greater even at the same

location, and optimal strategies for incumbent producers can largely ignore

locational characteristics.

Further exploration of this area was beyond the scope of this study, but would

provide useful insights towards the optimisation of producer behaviour.

8.4 Directions for future research

8.4.1 Longitudinal studies

Within the framework of this study, it was also not possible to examine long-run

market behaviour and price variation. The empirical area of the study was

constrained by:

• the nature of the market and its seasonal variation

• the impact of extraneous macroeconomic factors.

The market for any holiday accommodation is de facto highly seasonal and

operates on an annual cycle. Therefore to observe a single time series change in

price and the associated level of demand under like conditions requires a one-

year period, and to obtain a meaningful data set on this basis requires several

years of inflation-adjusted observations. In addition, in this particular case the

attempt to use quarterly data and thereby to observe any seasonal differences in

hedonic valuations as well as to measure the general impact of seasons through


dummy variables was frustrated by the effect of the economic recession

throughout Australia in 1993-4. This held back high season demand which would

normally have been well in excess of that for the previous low season, and forced

down ADR (average daily rate) roomrates as producers reduced their average

roomrates by offering much greater than usual discounts.

A longer-term longitudinal study would be valuable to test a number of

propositions. Firstly there is the question of whether producers vary prices

directly in correlation to any alterations in the levels of variable characteristics

that they may offer, and if so, by how much do they alter prices? This would

indicate whether producers are able to identify correctly the implicit marginal

prices and costs of these characteristics, and whether it is possible for them to set

marginal costs equal to marginal revenue for each one. Secondly, a longitudinal

study could more easily assess whether producers who do adjust prices to reflect

the valuation of FCDP gain a more optimal accommodation occupancy rate in

their rooms. The results in Figure 7.3 and the discussion in section 7.5.1 showed

only that an association exists between occupancy rates and variations from the

hedonic price mean; a study of adjustments could attempt to establish whether or

not causality exists between these variables.

Thirdly, a longitudinal study would be helpful to examine whether the pattern of

consumer utility for each locational characteristic is constant or changes over

time. This could be undertaken through repeated conjoint analysis tests using

samples with fixed demographic and socioeconomic properties.

If the assumptions made in dealing with the short run only are relaxed, it is clear

that the economic rent earned by a producer from the provision of locational

characteristics becomes an opportunity cost, when capitalised, if the location-

specific asset is to be offered for sale to a competitor. The capitalised opportunity

cost has ‘going concern’ value both because of the locational advantage in

production and because of the inherent value it represents as a guaranteed set of

characteristics within place-sensitive products regardless of a potential new

investor’s production competence. Therefore, sunk locational costs are not truly


sunk in the sense of being irrelevant costs when the location earns economic rent

through being a product characteristics set.

These long-run issues raise further avenues for study. Firstly, what effects would

new entrants have on the existing market? It is axiomatic that a new entrant

cannot offer exactly the same locational characteristics as an incumbent (although

in the Gold Coast example here they could locate at the same distance from the

beach, and at the same distance from the centre but in the opposite direction).

However, the model implies that a new entrant offering a location only

marginally different from that of an incumbent either sets similar prices or, more

likely, seeks maximum differentiation by offering quite different levels of

variable characteristics.

Secondly, from product life cycle theories in marketing, it is suggested that as a

product matures, more competition leads to the need for more product

differentiation. In a market for place-sensitive products that becomes crowded,

the opportunities for product differentiation are reduced, so one might expect life

cycles for differentiated products to become shorter and expect the market to tend

towards pure competition. A long-term study would be helpful to assess whether

this happens.

8.4.2 Land valuation, policy, and investment decisions

The current study has implications for investment decisions and planning policy.

Investment decisions in production plant such as hotels may involve the purchase

of an existing property or the development of a new one, where in either case the

location represents an element of revenue-generating capacity.

In the case of transactions on existing hotel properties, asset values are

traditionally based on number of rooms and the global ADR generated (Corgel &

deRoos 1993). Corgel and deRoos compare the accuracy of this ‘rule-of-thumb’

method of valuation with values predicted by an hedonic model developed in an

earlier paper (Corgel & deRoos 1992). The model, described by the authors as

based on ‘economic fundamentals’, regresses actual property sale prices on


property characteristics including locational characteristics, and is found to be

superior as an asset valuation tool. However, neither method isolates the value of

location characteristics as a revenue generator: the ADR method is based on total

revenue obtained, which is influenced by managerial competence of the seller,

whilst the fundamentals model includes hedonic valuation of each property’s

location per se, not as a contributor to a revenue stream. Use of the model

developed in this study should provide an improvement in that hotel room values

could include a discounted stream of FCDP values multiplied by expected

occupancy rates over the life of the investment. This fixed locational contribution

to property investment value would reflect income generating ability but be

independent of managerial operating competence.

For the choice of a location for initial development, as long as some competitors

are already in operation, feasibility studies may include the prediction of a similar

discounted stream of values based on the levels of location characteristics that the

site possesses in comparison with those of competitors. Stanton & Aislabie

(1992) imply the need for exactly this type of method to be used in the appraisal

of new resort developments.

There are further implications for land valuation and planning policy. The access,

site and neighbourhood characteristics that are generated by the land, rather than

the structures on the land, have implicit prices, in the current model, for use in

one industry which here is the tourism industry. By summing the land-generated

characteristics’ prices at all points over the physical extent of the market area it

would be possible to map isoprice contours for land value-in-use in the industry.

This would be valuable:

• for local authorities in the assessment of rateable values

• for planners wishing to compare the opportunity cost of land use, at various

locations, in the industry against the cost of alternative uses as an aid to land

zoning.


There is then scope to include valuation data obtained by this model into

geographical information systems (GIS) databases that can be of help in planning

and commercial investment appraisal for development (Oppermann & Brewer

1996).

8.5 Final note

The implications discussed briefly in sections 8.3 and 8.4 suggest that this study

is useful in providing pointers to a range of further theoretical and practical

developments. In summary, the study contained three main key components:

• the development of a variation to existing hedonic price models

• the use of a three-stage sequential methodology to provide, validate and

analyse data

• the successful empirical valuation of location and other characteristics of

place-sensitive products.

Appendices 158

Appendix 1

Issues in oligopoly theory relevant to the market for place-sensitive

products

Throughout this study, the assumption is made that suppliers of place-sensitive

products are acting as non-co-operative oligopolists. There is no evidence to suggest

that collusion takes place, and the existence of fixed differentiating characteristics

such as locations implies a balkanized market, as shown in section 3.2.3. Thus, there

exists no single product across the market upon which to base a monopolising cartel.

Secondly, since the focus of the study is on short-run positions, there is a

concentration on single-period oligopoly models as a background to behaviour. The

three most commonly cited models are those of Cournot (1838), Bertrand (1883) and

Stackelberg (1934). The Cournot model, and Stackelberg ‘follow-my-leader’ model,

are both concerned with suppliers’ strategic behaviour which is based on setting

optimum quantities for production. In the case of place-sensitive products, the setting

of production capacities takes place at the entry stage for a supplier, and any single

period decision making is likely to be concerned with the optimum use of the fixed

production capacity. This is likely to involve strategies of price setting (which is the

basis of the Bertrand model), advertising and other strategies for demand

management.

A market situation with differentiated products can be represented by spatial models,

such as those of Hotelling (1929) or Salop (1979), in which different sets of

consumers have different preferences such that any particular group will, cet. par.,

prefer the product of a particular supplier to any others. Alternatively, the market may

be described by a representative consumer model, in which suppliers have

differentiated products but all compete to sell to the same consumers. Markets for

place-sensitive products are likely to display properties found in both models, since

some of the characteristics (possibly access characteristics, for example) are likely to

appeal in the same way to all consumers, but others (such as an urban or rural

Appendices 159

preference, for example) appeal differently to different segments. This type of market

can be represented by a hybrid model such as that of Perloff & Salop (1985).

A final concern is whether producers of place-sensitive products are likely to be

myopic oligopolists. A myopic oligopolist may not fully process beliefs about its

competitors’ strategies, and may not therefore respond with an optimising strategy of

its own in the way that most models suggest. This issue has not been considered in

this study, and it is assumed that suppliers are operating with some reasonable level of

knowledge about their competitors, and that they react accordingly.

Appendices 160

Appendix 2Hotel grading scheme of Australian Motoring Organisations

Establishments in Queensland and otherAustralian States and Territories have beengranted ratings by the respective automobileclubs/associations for the benefit of members.Ratings are intended to indicate, in a generalsense, the STANDARD of accommodationoffered. All ratings are allocated on the basisof amenities and facilities provided by theestablishment at the time of inspection. Thesecould vary during the currency of this guide.Establishments rated must be clean and wellmaintained providing at least breakfast (exceptHoliday Units/Flats/Apartments and on-siteaccommodation in caravan parks). Othermeals, service, bathing and toilet facilities mustbe appropriate to the rating granted.

Motels/Hotels and Holiday Units must have aminimum of four units before being consideredfor rating and must contain within theirboundaries adequate off-street parking, or inthe case of multi-storeyed establishments,suitable alternative arrangements.Facilities may vary dependent on location andsize of establishments and this particularlyapplies to availability of all meals, loungeaccommodation, porterage and on-site parkingfacilities.Because a variety of accommodation ofdifferent standards is often available at the oneestablishment, the rating granted will apply tothe majority of units/rooms.

MOTEL/HOTEL RATING DEFINITIONS

!!!!! International style establishments offering a superior standard of appointments, furnishings and decor with an extensive range of first class guest services. A number and variety of room styles and/or suites available. Choice of dining facilities, 24 hour room service and additional shopping or recreational facilities available.

!!!!" Establishments offering all the comfort of a 4 star establishment but with a greater range of facilities, higher levels of presentation and individual guest services.

!!!! Exceptionally well appointed establishments with high quality furnishings and offering a high degree of comfort. Fully air conditioned. High standard of presentation and guest services provided. Restaurant and meals available on premises.

!!!" Establishments offering a similar standard to 3 star but with a higher standard of comfort/convenience.

!!! Well appointed establishments offering a comfortable standard of accommodation, with above average floor coverings, furnishings, lighting and ample heating/cooling facilities.

!!" Establishments offering a similar standard to 2 star but with a higher standard of comfort/convenience.

!! Well maintained establishments offering an average standard of accommodation with average furnishings, bedding, floor coverings, lighting, and heating and/or cooling facilities available.

!" Establishments offering a similar standard to 1 star but with a higher standard of comfort/convenience.

! Establishments offering a basic standard of accommodation. Simply furnished with adequate lighting. Motel units will all have private facilities. Resident manager.

Source: RACQ Accommodation Guide, 5th ed. November 1994

Appendices 161

Appendix 3International hotels and room types on the Gold Coast

Hotel Room type Code Number Total Market share "s"

ANA standard AST 250 6.36

high floor AH 120 3.05

superior ASU 38 0.97

408 10.37

Conrad low floor CL 360 9.15

high floor CH 186 4.73

corner room CCB 76 1.93

622 15.81

Gold Coast land view GCL 151 3.84

International sea view GCO 151 3.84

302 7.68

Hyatt Regency standard HST 180 4.58

Regency Club HRC 70 1.78

250 6.36

Marriott * land view ML 135 3.43

ocean/lagoon view MO 165 4.20

300 7.63

Pan Pacific standard PST 166 4.22

Pacific floor PP 25 0.64

corner room PC 36 0.92

standard high floor PH 71 1.81

298 7.58

Ramada floors 6-24 R6 260 6.61

floors 25-34 R25 135 3.43

floor 35 R35 11 0.28

406 10.32

Royal Pines standard RPS 210 5.34

high floor RPH 120 3.05

330 8.39

Sea World Nara standard SWN 402 10.22

402 10.22

Sheraton Mirage lagoon/garden SML 285 7.25

ocean SMO 65 1.65

350 8.90

Travelodge standard TST 180 4.58

queen room TQ 55 1.40

king room TK 30 0.76

265 6.74

TOTAL 3933

* Marriott room types were combined for this study as separate room rates were not availableSource: observation / survey by current author in 1994

Appendices 162

Appendix 4Examples of hotel brochures / advertisements with location claims

Source: Sheraton Mirage 1993 and The Pan Pacific Hotel 1993/4

Appendices 163

Appendix 5Maps of the Gold Coast

A The Gold Coast Statistical Area

Appendices 164

B Locations of International Standard Hotels

Appendices 165

Appendix 6International hotels on the Gold Coast: ownership (at start-up) andopening dates

Hotel Date opened Cost Owner($m)

Conrad Dec 1985 160 Jupiters Trust / Jennings /Conrad international

Ramada Dec 1985 80 HSP Nominees(Surfers Paradise Centre)

Holiday Inn (later ANA) May 1986 50 Matsushita Investment

Gold Coast International Dec 1986 53 Daikyo Corp

Sheraton Mirage Oct 1987 130 Mirage Resort Holdings / Mitsui /Nippon Shinpan

Hyatt Regency Jun 1988 70 Discovery Bay Devts

Sea World Nara Jul 1988 60 Van Der Drift Pty

Pan Pacific May 1989 230 Thakral Holdings

Royal Pines Dec 1990 300 Matsushita Investment / PrinceHotels

Travelodge Mar 1991 70 Southern Pacific Hotels

Marriott May 1992 200 LRP Gold Coast Pty

Source: Rider Hunt Queensland Development Survey 1994/5

Appendices 166

Appendix 7Locational characteristics featured in hotel brochures on the GoldCoast

��

Hotel Site characteristics featured Access featured

ANA ocean / mountain views beach"heart of Surfers Paradise"

Conrad gardens shopsonsite casino, entertainment

Gold Coast ocean / mountain viewsInternational

Hyatt Regency gardens boat to seariverbank golf, shops and restaurants

Movie World / Dreamworld

Marriott manmade beachgardensocean view

Pan Pacific ocean view shopscasino and entertainment

Ramada onsite shops, nightlife direct to beachocean / mountain views "heart of Surfers Paradise"

Royal Pines onsite golf Nerang river

Sea World Nara gardens direct Broadwater beachocean beachSeaworld

Sheraton Mirage ocean view Broadwatergardens and lagoon direct ocean beachfront

marina, shops, Seaworld

Travelodge ocean view beachshopsnightlife

��

��

Source: summarised from hotels’ main sales brochures between 1992 and 1996

Appendices 167

Appendix 8Questionnaire for survey to establish determinant characteristics

Hotel Guest Preferences

Could I please just ask for a few minutes of your time to complete this shortquestionnaire.

How important would you rate each of these features, in choosing a Gold Coastresort or hotel to stay at? Just circle one number for each feature.

1 Extremely important2 Important3 Quite important4 Only slightly important5 Not at all important

______________________________________________________________________

Limousine service to/from the hotel/resort 1 2 3 4 5Comfortable sitting area in your room/suite 1 2 3 4 5Early morning room service 1 2 3 4 5Tennis courts in the hotel/resort grounds 1 2 3 4 5Closeness to night-time entertainment 1 2 3 4 5Extent of the view from your room window 1 2 3 4 5Gymnasium or fitness centre available 1 2 3 4 5Modern architectural style 1 2 3 4 5Spacious lobby area 1 2 3 4 5Extra large beds (eg king size) 1 2 3 4 5Co-ordinated room decor 1 2 3 4 5Closeness to the beach 1 2 3 4 5Organised children's activities/playground 1 2 3 4 5Efficient check-in and room service staff 1 2 3 4 5Valet service for shoes 1 2 3 4 5Late evening room service 1 2 3 4 5All day room service 1 2 3 4 5A sauna available 1 2 3 4 5Personal butler service 1 2 3 4 5Comfortable lobby area 1 2 3 4 5A minibar in the room 1 2 3 4 5Closeness to a main shopping area 1 2 3 4 5A low-rise hotel or resort 1 2 3 4 5Sunbathing areas in the hotel/resort grounds 1 2 3 4 5A very spacious room or suite 1 2 3 4 5Architecture in keeping with the surroundings 1 2 3 4 5A spa in the hotel/resort grounds 1 2 3 4 5Valet service for your laundry 1 2 3 4 5In-house live entertainment 1 2 3 4 5Closeness to a marina 1 2 3 4 5

Appendices 168

Very comfortable beds 1 2 3 4 5Expensive decor in lobby areas 1 2 3 4 5An ocean view from your room window 1 2 3 4 5All night room service 1 2 3 4 5Friendly check-in and room service staff 1 2 3 4 5Direct access to the beach 1 2 3 4 5Thick carpeting in your room or suite 1 2 3 4 5Gardens around the hotel/resort 1 2 3 4 5Closeness to a golf course 1 2 3 4 5Porter service to and from rooms 1 2 3 4 5A swimming pool in the hotel/resort grounds 1 2 3 4 5An uncongested or quiet location 1 2 3 4 5

Finally, could you please indicate whether you are staying on the Gold Coast:

mainly for business or at a convention? #mainly for a holiday? #

And where is your home?

Australia #not in Australia #

Many thanks for your help.

Locator: ____________________ ____ ____

Appendices 169

Appendix 9Characteristics survey: variables used in the analysis, with meanrating scores

Name Description Meanscore

TYP1 Hotel locator (hotel name)TYP2 Respondent type locator (business / holiday)TYP3 Respondent's home (domestic / international)LIMO Limousine service 3.648026SIT Comfortable sitting area 1.796053AMRS Early morning roomservice 2.569079TENN Tennis 3.638158ENT Close to entertainment 2.851974V_EX Extent of view 1.733553GYM Gym / fitness centre 3.621711MODA Modern architecture 3.121711SPAL Spacious lobby 3.088816KING Large beds eg king size 2.210526DECO Co-ordinated room decor 2.776316BEAC Close to beach 1.993421KIDS Kids activities 3.473684EFFI Efficient staff 1.680921VALE Valet for shoes 4.042763PMRS Late pm roomservice 2.486842DARS All day roomservice 2.500000SAUN Sauna 3.141447BUTL Butler 4.151316COML Comfortable lobby 2.980263MINB Minibar in the room 2.536184SHOP Close to shops 2.516447LOW Low-rise hotel 2.884868SUNB Sunbathing areas 2.210526SPAC Spacious room 1.967105ENVA Architecture in keeping 2.500000SPA Spa 3.026316LAUN Laundry valet 3.190789LIVE Live entertainment 2.802632MARI Close to marina 3.927632BEDS Comfortable beds 1.509868DECL Expensive lobby decor 3.095395V_OC Ocean view 2.121711NIRS All night roomservice 2.703947FRIE Friendly staff 1.648026ACBE Beach access 2.253289CARP Thick carpet in the room 3.470395GARD Gardens 2.625000GOLF Close to golf 3.687500PORT Porter service 2.628289POOL Swimming pool 1.690789QUIE Quiet location 2.447368

(n = 304)

Appendices 170

Appendix 10Results of the analysis of variance of views of hotel characteristicsbetween respondent types (TYP2: business / holiday, and TYP3: domestic /international) (Program: SPSS)

* * * * * * A n a l y s i s o f V a r i a n c e * * * * * *

304 cases accepted. 0 cases rejected because of out-of-range factor values. 0 cases rejected because of missing data. 4 non-empty cells.

1 design will be processed.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

* * * * * * A n a l y s i s o f V a r i a n c e -- design 1 * * * * * *

EFFECT .. TYP2 BY TYP3 Multivariate Tests of Significance (S = 1, M = 13 , N = 135 1/2)

Test Name Value Exact F Hypoth. DF Error DF Sig. of F

Pillais .08444 .89917 28.00 273.00 .616 Hotellings .09222 .89917 28.00 273.00 .616 Wilks .91556 .89917 28.00 273.00 .616 Roys .08444 Note.. F statistics are exact.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - EFFECT .. TYP2 BY TYP3 (Cont.) Univariate F-tests with (1,300) D. F.

Variable Hypoth. SS Error SS Hypoth. MS Error MS F Sig. of F

ACBE .01468 346.67718 .01468 1.15559 .01270 .910 AMRS 1.49186 331.72042 1.49186 1.10573 1.34920 .246 BEAC .03715 311.81205 .03715 1.03937 .03574 .850 BEDS .39723 121.99634 .39723 .40665 .97684 .324 COML .72941 320.43090 .72941 1.06810 .68290 .409 DARS .14081 365.44767 .14081 1.21816 .11559 .734 DECO .07344 329.32443 .07344 1.09775 .06690 .796 EFFI 1.15196 214.40200 1.15196 .71467 1.61188 .205 ENT 2.07755 503.46463 2.07755 1.67822 1.23795 .267 ENVA .61630 284.60652 .61630 .94869 .64964 .421 FRIE .14410 169.27507 .14410 .56425 .25539 .614 GARD 7.60622 409.44258 7.60622 1.36481 5.5731 .019 KING .83219 250.73937 .83219 .83580 .99568 .319 LIVE 1.19764 394.65284 1.19764 1.31551 .91040 .341 LOW 1.26225 324.38916 1.26225 1.08130 1.16735 .281 MINB .73506 312.48201 .73506 1.04161 .70569 .402 NIRS 3.23097 411.51616 3.23097 1.37172 2.35541 .126 PMRS 1.43736 353.40124 1.43736 1.17800 1.22017 .270 POOL .04215 184.58927 .04215 .61530 .06850 .794 PORT 3.30692 311.94423 3.30692 1.03981 3.1803 .076 QUIE 1.15819 495.06372 1.15819 1.65021 .70184 .403

Appendices 171

SAUN 1.27572 360.75520 1.27572 1.20252 1.06087 .304 SHOP .00495 409.68964 .00495 1.36563 .00363 .952 SIT .05661 197.48445 .05661 .65828 .08599 .770 SPAC 1.61507 232.90664 1.61507 .77636 2.08033 .150 SUNB 2.19106 405.27944 2.19106 1.35093 1.62189 .204 V_EX .00209 255.02910 .00209 .85010 .00246 .960 V_OC .11894 287.87723 .11894 .95959 .12395 .725


EFFECT .. TYP3 Multivariate Tests of Significance (S = 1, M = 13 , N = 135 1/2)


Pillais .11248 1.23563 28.00 273.00 .198 Hotellings .12673 1.23563 28.00 273.00 .198 Wilks .88752 1.23563 28.00 273.00 .198 Roys .11248 Note.. F statistics are exact.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - EFFECT .. TYP3 (Cont.) Univariate F-tests with (1,300) D. F.


ACBE .81178 346.67718 .81178 1.15559 .70248 .403 AMRS .95186 331.72042 .95186 1.10573 .86084 .354 BEAC .07018 311.81205 .07018 1.03937 .06752 .795 BEDS 2.30971 121.99634 2.30971 .40665 5.67978 .018 COML 1.31482 320.43090 1.31482 1.06810 1.23099 .268 DARS .02725 365.44767 .02725 1.21816 .02237 .881 DECO 3.32600 329.32443 3.32600 1.09775 3.02984 .083 EFFI .30092 214.40200 .30092 .71467 .42106 .517 ENT 2.96070 503.46463 2.96070 1.67822 1.76420 .185 ENVA .94539 284.60652 .94539 .94869 .99653 .319 FRIE 1.50258 169.27507 1.50258 .56425 2.66296 .104 GARD .19291 409.44258 .19291 1.36481 .14135 .707 KING .11875 250.73937 .11875 .83580 .14208 .706 LIVE 3.74433 394.65284 3.74433 1.31551 2.84629 .093 LOW 1.29312 324.38916 1.29312 1.08130 1.19589 .275 MINB .15755 312.48201 .15755 1.04161 .15126 .698 NIRS .04074 411.51616 .04074 1.37172 .02970 .863 PMRS .76578 353.40124 .76578 1.17800 .65007 .421 POOL 2.17045 184.58927 2.17045 .61530 3.52748 .061 PORT 2.21662 311.94423 2.21662 1.03981 2.13174 .145 QUIE 1.22459 495.06372 1.22459 1.65021 .74208 .390 SAUN 3.46297 360.75520 3.46297 1.20252 2.87976 .091 SHOP 1.24533 409.68964 1.24533 1.36563 .91190 .340 SIT 3.49928 197.48445 3.49928 .65828 5.31578 .022 SPAC 3.36576 232.90664 3.36576 .77636 4.33533 .038 SUNB 2.23167 405.27944 2.23167 1.35093 1.65195 .200 V_EX .14982 255.02910 .14982 .85010 .17624 .675 V_OC .00215 287.87723 .00215 .95959 .00225 .962


Appendices 172

EFFECT .. TYP2 Multivariate Tests of Significance (S = 1, M = 13 , N = 135 1/2)


Pillais .13749 1.55427 28.00 273.00 .041 Hotellings .15941 1.55427 28.00 273.00 .041 Wilks .86251 1.55427 28.00 273.00 .041 Roys .13749 Note.. F statistics are exact.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - EFFECT .. TYP2 (Cont.) Univariate F-tests with (1,300) D. F.


ACBE .07588 346.67718 .07588 1.15559 .06567 .798 AMRS .03600 331.72042 .03600 1.10573 .03255 .857 BEAC .01639 311.81205 .01639 1.03937 .01577 .900 BEDS 4.26461 121.99634 4.26461 .40665 10.48707 .001 COML .38145 320.43090 .38145 1.06810 .35713 .551 DARS .21944 365.44767 .21944 1.21816 .18014 .672 DECO 5.99882 329.32443 5.99882 1.09775 5.46466 .020 EFFI .00836 214.40200 .00836 .71467 .01170 .914 ENT 2.02763 503.46463 2.02763 1.67822 1.20821 .273 ENVA 2.10121 284.60652 2.10121 .94869 2.21486 .138 FRIE .02118 169.27507 .02118 .56425 .03753 .847 GARD .80339 409.44258 .80339 1.36481 .58865 .444 KING 4.01850 250.73937 4.01850 .83580 4.80798 .029 LIVE .00606 394.65284 .00606 1.31551 .00461 .946 LOW .73906 324.38916 .73906 1.08130 .68349 .409 MINB .06383 312.48201 .06383 1.04161 .06128 .805 NIRS .50748 411.51616 .50748 1.37172 .36996 .543 PMRS .06229 353.40124 .06229 1.17800 .05288 .818 POOL .34941 184.58927 .34941 .61530 .56787 .452 PORT 14.73427 311.94423 14.73427 1.03981 14.17010 .000 QUIE .27164 495.06372 .27164 1.65021 .16461 .685 SAUN 9.33791 360.75520 9.33791 1.20252 7.7653 .006 SHOP 1.31226 409.68964 1.31226 1.36563 .96092 .328 SIT .99305 197.48445 .99305 .65828 1.50854 .220 SPAC 4.54252 232.90664 4.54252 .77636 5.85109 .016 SUNB .48994 405.27944 .48994 1.35093 .36267 .547 V_EX .08678 255.02910 .08678 .85010 .10208 .750 V_OC .37921 287.87723 .37921 .95959 .39518 .530

Appendices 173

Appendix 11Results of a factor analysis (by principal components) on ratings of28 characteristics of Gold Coast international hotels (Program:Statistica)

Eigenvalues (phdfa3.sta)Extraction: Principal components

% total Cumul. Cumul.EigenvalVariance Eigenval %

1 4.729412 16.89076 4.72941 16.890762 3.758772 13.42419 8.48818 30.314943 3.282935 11.72477 11.77112 42.039714 2.817100 10.06107 14.58822 52.100785 1.774200 6.33643 16.36242 58.437216 1.647461 5.88379 18.00988 64.321007 1.224337 4.37263 19.23422 68.69363

Varimax rotation converged in 6 iterationsFactor Loadings (Varimax raw) (phdfa3.sta)Extraction: Principal components(Marked loadings are > .500000)

Factor Factor Factor Factor Factor Factor Factor 1 2 3 4 5 6 7

SIT .027263 .335776 .663235 .090530 .001372 .012823 -.389459AMRS .788113 -.015752 -.045792 -.013312 .114736 -.110706 -.146985ENT .008316 .117507 .047398 .858138 .075100 .122881 .068577V_EX .093869 .704354 .100235 .142304 .005876 .239904 -.246194KING .281632 -.004915 .100991 -.006813 .040161 .197790 -.595044DECO .207529 -.043412 .822136 .056085 .000052 -.125142 .201155BEAC .062334 .855254 .054391 .159716 .187990 -.054779 .049612EFFI -.082658 -.062014 .151735 .013844 .012205 .863118 .018455PMRS .888755 .063691 .066047 .104450 .037768 -.019778 .037568DARS .886116 .057493 -.005692 .129545 -.068307 .015745 -.044989SAUN .081196 .146559 -.123133 .059683 .033540 .227203 .762816COML -.057386 -.194873 .414180 .149881 -.625771 .159038 .015599MINB .752795 -.049584 .158998 -.035800 -.063138 -.163834 .051542SHOP -.023521 .124759 .005863 .847978 .009812 -.019370 -.176249LOW -.049242 -.116997 -.075317 -.145024 -.789669 -.186056 .024451SUNB .113766 .635276 .016705 -.082764 .165610 .131790 .359588SPAC .044353 .166146 .631325 -.053280 -.232993 .181087 -.124279ENVA -.167595 -.103489 -.085204 -.021023 -.792614 .127068 -.068994LIVE .125973 -.052668 .033587 .841600 -.128255 .059056 .110267BEDS -.156685 .026059 .763418 -.112521 .077626 .202796 -.121650V_OC .056964 .841776 .004368 .033201 -.052356 -.040789 -.041054NIRS .870304 .077135 .040861 .039027 .254067 -.055547 .041324FRIE -.139498 .027782 -.008101 .096374 -.053759 .830357 .090299ACBE -.003037 .788189 .031450 -.008039 .124322 -.166017 .086386GARD -.098889 .165627 .179048 -.529696 -.444667 .107198 .139758PORT .197862 .036047 .634771 -.162946 .073171 .149815 -.181237POOL -.179363 .572706 .104943 -.250350 -.101522 .093377 .282905QUIE -.252478 -.022312 .241180 -.680876 -.220762 .036092 -.091899

Expl.Var3.926904 3.597773 2.885414 3.165471 2.162596 1.903897 1.592162Prp.Totl .140247 .128492 .103050 .113053 .077236 .067996 .056863

Appendices 174

Appendix 12Conjoint analysis data collection instrument

Gold Coast, International Hotel Preferences

Here are a number of concepts for the location of an international hotel, and the viewfrom rooms. Please give a rating out of 20 to each concept, imagining you werechoosing a hotel to stay at. (Assume you have enough money!)

Distance to shops Distance to View from the Cost of RATINGand entertainment the beach window the room OUT OF 20

of your room ($ per night)

In a central area On the beach Garden 250 _____Out of town * 5-10 minutes No extensive view 250 _____Out of town * Within 5 minutes No extensive view 300 _____Within 5 minutes On the beach No extensive view 200 _____In a central area On the beach Ocean view 200 _____In a central area Within 5 minutes Extensive land view 250 _____Out of town * 5-10 minutes Garden 200 _____Quiet area further out More than 10 minutes No extensive view 250 _____Within 5 minutes Within 5 minutes Extensive land view 300 _____In a central area 5-10 minutes No extensive view 150 _____Within 5 minutes 5-10 minutes Extensive land view 250 _____Quiet area further out 5-10 minutes Extensive land view 100 _____In a central area 5-10 minutes No extensive view 300 _____Within 5 minutes Within 5 minutes No extensive view 100 _____Quiet area further out Within 5 minutes No extensive view 200 _____Within 5 minutes More than 10 minutes No extensive view 150 _____In a central area More than 10 minutes Garden 100 _____Out of town * On the beach Extensive land view 150 _____In a central area On the beach No extensive view 100 _____In a central area More than 10 minutes Extensive land view 200 _____Within 5 minutes Within 5 minutes Garden 100 _____Quiet area further out More than 10 minutes Garden 150 _____Out of town * More than 10 minutes Garden 300 _____Quiet area further out On the beach Ocean view 300 _____In a central area Within 5 minutes Ocean view 150 _____Out of town * Within 5 minutes Ocean view 250 _____

* Out of town, in a park or rural area, with golf course(s) around

Appendices 175

Appendix 13Conjoint analysis specification and results (Program: Conjoint Designer /Conjoint Analyzer)

Feature Levels Model Parametersrequired

shops 4 ideal point 2 (vector + ideal point)beach 4 ideal point 2 (vector + ideal point)view 4 part-worth 3 (no. of levels - 1)price 5 vector 1 (vector)

1 (intercept)--9 (T)

26 cards (n) d/f = 17 n/T = 2.89

Correlation matrix1 1.02 0.0 1.03 0.1 -0.1 1.04 0.1 0.0 -0.1 1.0

Condition no: 16.04

-----------------------------------------------------------------------------------------------------

72 respondents. Av. adj. R square = 0.712 (S.E. = 0.066)

shops Indiv. RI = 18.11 (S.E. = 2.07) Group RI = 16.92vector ideal-point | out of town quiet area within 5 central0.912 (0.134) -1.000 (0.014) | -0.850 1.919 2.067 0.000

|beach Indiv. RI = 48.91 (S.E. = 3.24) Group RI = 52.15

vector ideal-point | on beach within 5 5 - 10 more than 10-1.216 (0.206) -0.015 (0.002) | 0.000 -3.933 -5.101 -6.580

|view Indiv. RI = 13.72 (S.E. = 4.94) Group RI = 10.91

| no extensive garden ext. land ocean| 0.000 0.093 0.438 1.002|

price Indiv. RI = 19.26 (S.E. = 3.06) Group RI = 20.02vector | $100 $150 $200 $250 $300-0.013 (0.002) | -1.267 -1.900 -2.533 -3.167 -3.800

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