An Inquiry Into Pricing Of Hotels

IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’

Table of Contents

C h a p t e r 1 : C o n c e p t u a l i s a t i o n o f I s s u e ....................................................................... 4
1 . 1 I n t r o d u c t i o n ..................................................................................................................... 4
1 . 2 I s s u e I d e n t i f i c a t i o n ...................................................................................................... 4
1 . 3 D i s s e r t a t i o n A i m ........................................................................................................... 6
1 . 4 D i s s e r t a t i o n O b j e c t i v e s .............................................................................................. 6
1 . 5 S c o p e a n d L i m i t a t i o n .................................................................................................. 6
1 . 6 D i s s e r t a t i o n S t r u c t u r e ................................................................................................ 7
.
1 . 7 C o n c l u s i o n ........................................................................................................................ 7
C h a p t e r 2 : R e v i e w o f L i t e r a t u r e .................................................................................... 8
2 . 1 I n t r o d u c t i o n ..................................................................................................................... 8
2 . 2 R e v e n u e M a n a g e m e n t P a r a d i g m ............................................................................. 8
2 . 3 P r i c i n g f r o m t h e P e r s p e c t i v e o f E c o n o m i c s a n d M a r k e t i n g ................... 11
2 . 3 . 1 B u y e r s R e s p o n s e t o P r i c e ............................................................................... 11
T H E M A R K E T I N G M I X ................................................................................................. 14
2 . 3 . 2 H o t e l s D e t e r m i n a t i o n o f P r i c e s ................................................................... 16
.
M O N O P O L Y ...................................................................................................................... 18
O L I G O P O L Y ...................................................................................................................... 19
M O N O P O L I S T I C C O M P E T I T I O N ................................................................................ 20
2 . 3 . 2 I n d u s t r y a n d E c o n o m y W i d e R o l e P r o c e s s ............................................. 22
2 . 4 B a r g a i n i n g T h e o r y o f P r i c i n g ............................................................................... 24
2 . 5 P r i c e i n S e r v i c e O r g a n i s a t i o n s ............................................................................. 27
2 . 5 . 1 S e l e c t i n g a P r i c i n g M e t h o d ............................................................................ 29
C O S T - B A S E D M E T H O D S ............................................................................................. 29
C O M P E T I T I O N - B A S E D M E T H O D S ............................................................................ 29
C U S T O M E R - B A S E D P R I C I N G .................................................................................... 30
.
2 . 5 . 2 S e l e c t i n g a P r i c i n g P o l i c y .............................................................................. 30
2 . 5 . 2 E n v i r o n m e n t .......................................................................................................... 32
.
E C O N O M I C F A C T O R S ................................................................................................... 33
M A R K E T F A C T O R S ........................................................................................................ 34
2 . 6 C o n c l u s i o n ...................................................................................................................... 35

1 | P a g e Lehry, A. (H‐1270)


C h a p t e r 3 : R e s e a r c h M e t h o d o l o g y .............................................................................. 36
3 . 1 I n t r o d u c t i o n ................................................................................................................... 36
3 . 2 T h e R e s e a r c h P u r p o s e a n d F r a m e w o r k ............................................................. 36
3 . 3 T h e R e s e a r c h P r o c e s s ............................................................................................... 39
.
3 . 3 . 1 H y p o t h e t i c o - D e d u c t i v e M e t h o d ................................................................... 40
O B S E R V A T I O N S T A G E ................................................................................................. 40
P R E L I M I N A R Y D A T A G A T H E R I N G .......................................................................... 41
T H E O R Y F O R M U L A T I O N ............................................................................................. 42
H Y P O T H E S I S I N G ............................................................................................................ 43
F U R T H E R S C I E N T I F I C D A T A C O L L E C T I O N ......................................................... 44
D A T A A N A L Y S I S ........................................................................................................... 47
C O N C L U S I O N ................................................................................................................... 47
C h a p t e r 4 : D a t a A n a l y s i s a n d I n t e r p r e t a t i o n ........................................................ 48
.
4 . 1 I n t r o d u c t i o n ................................................................................................................... 48
4 . 2 R e s p o n d e n t O n e ............................................................................................................ 49
4 . 3 R e s p o n d e n t T w o ........................................................................................................... 52
4 . 4 R e s p o n d e n t T h r e e ........................................................................................................ 55
4 . 5 R e s p o n d e n t F o u r .......................................................................................................... 58
.
4 . 6 R e s p o n d e n t F i v e ........................................................................................................... 61
4 . 7 I n f e r e n c e o f P r i c i n g M e t h o d s ............................................................................... 65
4 . 8 I n f e r e n c e o f P r i c i n g P o l i c i e s ................................................................................. 65
4 . 9 I n f e r e n c e o f E n v i r o n m e n t a l C h a r a c t e r i s t i c s ................................................... 67
.
4 . 1 0 C o n c l u s i o n ................................................................................................................... 68
C h a p t e r 5 : C o n c l u s i o n a n d I m p l i c a t i o n ................................................................... 69
5 . 1 I n t r o d u c t i o n ................................................................................................................... 69
5 . 2 R e s e a r c h O v e r v i e w ..................................................................................................... 69
5 . 3 I m p l i c a t i o n s ................................................................................................................... 73
5 . 4 S c o p e f o r F u r t h e r R e s e a r c h ................................................................................... 74
.
B i b l i o g r a p h y .......................................................................................................................... 75
B o o k s ..................................................................................................................................... 75
A r t i c l e s ................................................................................................................................ 75
.

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List of Figures
F I G U R E 2 . 1 : F O U R P ’ S O F M A R K E T I N G M I X . ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 14
F I G U R E 2 . 2 : F O R M S O F I M P E R F E C T C O M P E T I T I O N . ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 18
‐

F I G U R E 3. 1: P R O P O S E D R E S E A R C H F R A M E W O R K ................................................................................ 38
F I G U R E 3. 2: H Y P O T H E T I C O ‐ D E D U C T I V E R E S E A R C H M E T H O D A D O P T E D F R O M S E K A R A N (1992) ..... 40
.

List of Tables
T A B L E 4 . 1 : R E S P O N D E N T O N E ’ S R E S P O N S E T O P R I C I N G S T R A T E G Y . ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 49
T A B L E 4 . 2 : R E S P O N D E N T O N E ’ S R E S P O N S E T O E N V I R O N M E N T A L C H A R A C T E R I S T I C S . ‐‐‐‐‐‐‐‐ 50
T A B L E 4 . 3 : R E S P O N D E N T T W O ’ S R E S P O N S E T O P R I C I N G S T R A T E G Y . ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 52
T A B L E 4 . 4 : R E S P O N D E N T T W O ’ S R E S P O N S E T O E N V I R O N M E N T A L C H A R A C T E R I S T I C S . ‐‐‐‐‐‐‐‐ 53
T A B L E 4 . 5 : R E S P O N D E N T T H R E E ’ S R E S P O N S E T O P R I C I N G S T R A T E G Y . ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 55
T A B L E 4 . 6 : R E S P O N D E N T T H R E E ’ S R E S P O N S E T O E N V I R O N M E N T A L C H A R A C T E R I S T I C S . ‐‐‐‐‐ 56
T A B L E 4 . 7 : R E S P O N D E N T F O U R ’ S R E S P O N S E T O P R I C I N G S T R A T E G Y . ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 58
T A B L E 4 . 8 : R E S P O N D E N T F O U R ’ S R E S P O N S E T O E N V I R O N M E N T A L C H A R A C T E R I S T I C S . ‐‐‐‐‐‐‐ 59
T A B L E 4 . 9 : R E S P O N D E N T F I V E ’ S R E S P O N S E T O P R I C I N G S T R A T E G Y . ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 61
T A B L E 4 . 1 0 : R E S P O N D E N T F I V E ’ S R E S P O N S E T O E N V I R O N M E N T A L C H A R A C T E R I S T I C S . ‐‐‐‐‐‐ 62

3 | P a g e Lehry, A. (H‐1270)


Chapter 1: Conceptualisation of Issue

1.1 Introduction

This chapter consists of a brief description of the issue that the
researcher would like to pursue. In this description the author
identifies the main area of research. The chapter then continues to
describe the aims, objectives, scope and limitations of the research.
This research aims to find out the relationship between two
variables.

1.2 Issue Identification

According to Mckinsey’s consultants, the fastest and most effective
way for a firm to achieve maximum profit is to price services
appropriately, Tung et al. (1997). Price of a product or service is
the only market mix element that helps generate revenue for the
organisation. A number of authors have recommended the value of
pricing for every organisation’s profitability and long-term
survival. Thus, it is crucial that managers have a good
understanding of price. If a product or service is over charged then
there is a threat of losing present and prospective customers, while
when charging a diminutive amount an organisation will lose
revenue that would help maintain the operations properly or help in
the future expansion.

In the hotel industry, the industry cost structure and the perishable
nature of its product make it extremely crucial to sell their product
at an optimum price. A hotel room which is unsold on any
particular night cannot be stocked to subsequently offer to guests
at a later stage. Thus, selling each room each night at the best
possible price is critical to a hotel’s long-term success. From a
micro-economic perspective, price is the single most important
decision in marketing.

4 | P a g e Lehry, A. (H‐1270)


Pricing is traditionally recognized to play a central role in the
functioning of the economic system. The three macro-economic
functions of price are: allocation or rationing, or the balancing of
the quantities demanded and those supplied; stimulation, and acting
as an incentive for new players and products to enter a
marketplace; and distributive, whereby income is distributed
between buyers and sellers.

Internal monetary considerations and external market
considerations are in most organisations, important forces that
determine the organisations pricing strategies. In today’s highly
competitive market, organisations must be aware of the
environment in which they operate and the external factors that
influence them. These factors can affect the main internal factors
of the organisation and its pricing policies or marketing strategies.
The external environment is unpredictable to large extent and many
of the external forces can change quickly and dramatically and are
usually beyond a firm’s control. Although some external factors
can pose a threat to a business, they can also create new
opportunities.

This dissertation aims to analyse the relationship between
environmental characteristics and pricing strategies in the Indian
hospitality sector. It is argued by many authors that environmental
characters such as political scenario, economics, and socio-culture
often are the driving factors for an organisation in adopting pricing
practices. The author however through the research would like to
find out how change in environmental characteristics would affect
the pricing strategy of a hotel in India.

The dissertation is inspired from the study of George J. Avlonitis
and Kostis A. Indounas, Department of Marketing and
Communications, Athens University of Economics and Business,
Athens, Greece who have carried out extensive research in the area
of pricing in the Greek service sector.

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1.3 Dissertation Aim

The aim of this research is to investigate the effect of changes in
environmental characteristics on pricing strategies of an
organisation.

1.4 Dissertation Objectives

The objectives of this research are:

Explore the environmental characteristics that influence pricing.
To provide a theoretical framework on pricing methods and
pricing policies in the hotel industry.
Determine whether hotels can respond to change in environment
through pricing.

1.5 Scope and Limitation

The dissertation attempts to examine empirically the potential
relationship between pricing strategies and environmental
characteristics. Though, a lot of importance is attached to
competitive issues when setting prices, organisations need to treat
the concept of pricing in a more “holistic” approach, where apart
from competition; emphasis will also be laid on other
environmentally related characteristics. The significance of these
findings notwithstanding, the context of the study is a caveat, since
it limits the ability to generalize the results to other countries
other than Indian hotel industry. This research is limited to the
study of pricing from the rooms division point of view only.

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1.6 Dissertation Structure

The dissertation is organized as follows: first, a comprehensive
review of the existing literature on pricing strategies and
environmental variables is presented. Second, the research
methodology used is provided. Third, the data analysis and the
inference of results are presented, while, finally, the conclusions
along with the basic implications of the main findings of the study
and the directions for future research are presented.

1.7 Conclusion

This chapter describes the area of research which the researcher
would like to pursue. It is clearly evident that pricing of products
and services is of paramount importance to an organisation. The
question here is how they get this concept of pricing right.

Having talked about the importance of price in generating revenue
and its contribution to the long-term sustainability of an
organisation, this research will further decipher the concept of
pricing from different perspectives and will aim to operationalise
its finding to the real world scenario.

Note: The term organisation and firm has been used randomly in
the document with reference to hotels in the Indian hospitality
sector.

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Chapter 2: Review of Literature

2.1 Introduction

On having identified the broad area of research and narrowing
down on the issue to think about on, this chapter aims to gain
insight into the issue of pricing in service industry i.e. hotels, from
the perspective of different disciplines.

Revenue is generally realised and earned when there is a
convincing evidence that an arrangement exists, delivery has
occurred or services have been rendered , the sellers price to the
buyer is fixed or determinable and collectability is reasonably
assured.

2.2 Revenue Management Paradigm

“Revenue Management has proven to be a devastatingly effective
competitive device.”
- Dr. Alfred Kahn

Revenue management emerged first from the airline industry. It
served as a tool to deal with new competitors (invariably low cost)
and fierce pricing wars that resulted from deregulation. Currently
revenue management is a business practice used by a wide range of
industries. Revenue management is the art and science of
forecasting real-time customer demand and optimise the price given
the availability of products.

“Revenue Management is defined as the application of disciplined
tactics that predict consumer behaviour at the micro-market level
and optimise product availability at the requisite price to maximise
revenue growth.” (Cross, 1997, pg 32).

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This definition builds a base for study of issues pertaining to
maximising revenue earning. It also involves research of markets
and competition, while developing correct pricing strategies for
each market segment. Revenue management is a new way to manage
supply and demand. It enhances revenue productivity by achieving
a precise understanding of the demand for a company’s products
and services at the micro-market level. The smooth management of
all three processes results in revenue maximisation.

Yield Management + Pricing strategy + Market Optimisation =
Revenue Maximisation.

Revenue management was conceptualised to overcome the need to
equalize the opportunity losses primarily due to the perishable
nature of inventory. Organisations dealing in perishable inventory
need to take advantage of supply and demand conditions in the
market to maximise on the revenue generation potential by
tweaking the pricing, i.e. increasing prices when demand exceeds
supply and vice versa. (Kasavana and Brooks, 1996).

Nykiel (1997) added that revenue management is an enriched mix
of strategies to maximise revenue based on customer perception of
the competitor, positioning of the product and a suitable strategy to
gain advantage from corresponding market conditions. Based on
this technique inventory managers can decide what value can be
offered to customers in terms of price, products or other intangible
benefits.

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Robert Cross on the other hand has described seven core concepts
of revenue management –

Focus on price rather than costs when balancing supply and
demand.
Replace cost-based pricing with market based pricing.
Sell to segmented micro markets, not to mass markets.
Save your products for your most valuable customers.
Make decisions based on knowledge, not supposition.
Continually re-evaluate your revenue opportunities.

Donaghy et al. (1997) say that revenue management is a tool that
helps to increase revenue through the forecasted distribution of
room inventory to predetermined market segments at an optimum
price.

Many authors present a comprehensive view by interpreting yield
management as an instrument with the capability to generate better
revenue with the help of information systems, technology,
profitability, statistics, organisation theory, business experience
and knowledge.

The objective of revenue management is to ensure that companies
will sell the right product to the right customer at the right time
for the right price.

Price discrimination is the term used to describe the practice of
setting variable pricing policy, and selling the same product or
service to different customers at different prices.

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2.3 Pricing from the Perspective of Economics
and Marketing

From the earlier section it is clearly evident that pricing of
products and services is of utmost importance for an organisation’s
profitability and long-term success. Revenue management looks at
pricing from the point of view of economics (demand and supply)
and marketing (an essential component of the marketing mix) and
amalgamates the essence of pricing from both the disciplines to
form powerful tools in-order to maximise an organisations revenue
generation capacity. Now let us look at pricing from the
perspective of economics and marketing.

Pricing is a vital issue both for marketing and economics. Pricing
as a concept is critical for organisations and its consumers and
plays a vital role in the economics of any country or industry.
Skouras et al. (2005) have studied the transitional basis of price in
three different perspectives. Each of these perspectives have been
discussed in detail.

2.3.1 Buyers Response to Price

The primary distinguishing factor of pricing in economics and
marketing is the buyers’ behaviour of rationality, whether the
buyer can be considered rational or not during a transaction.

Economics as a discipline believes that buyers are rational so that
they can maximise utility. This is also in consonance to the utility-
maximisation theory. Thus price is a determinant of this utility.
This maximisation of utility is dependent upon the disposable
income or purchasing power of the buyer. Hence “buyers’ response
to prices is, according to economics, an exercise in utility-
maximisation under constraints.”(Skouras et. al., 2005).

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The law of demand is derived from this theory that when the
demand of a product or service falls the price rises and vice versa.

Many theorists contradict the law of demand by positing that it
does not necessitate the assumption of rationality. The inverse
relationship between price and demand may be inferred from
various behavioural assumptions like habit and random buying.
Therefore, economics looks at rational buyer behaviour rather than
focussing on how buyers behave in reality. Thus pricing is the most
important criterion in buyer’s decision.

The subject of marketing looks at the entire story from a different
perspective. Firstly it proposes that the buyer relates higher price
with higher quality as they do not have any other method to secure
the quality of the product. Secondly, Weber-Fechner’s’ Law states
that “buyers tend to perceive price differences in proportional
rather than in absolute term.”, Skouras et al. (2005). For example
if a buyer has a choice to choose between,

Case A: a $1000 word processor and a $400 word processor,
Case B: a $20,000 word processor and a $19,600 word processor.

The buyer in case A would go for the $400 processor and in case B
would go for the $20,000 processor as the buyer perceives a forty
percent price difference in the first case and a two percent price
difference in the second. According to economics the rational
buyer would not exhibit a difference in behaviour in both the cases.

Suri et al. (2004) as cited Skouras et al. (2005) have also
empirically established that buyer observe prices from left to right
and their decisions are based on the calculation of price difference,
from the digits on to the left.

The fourth buyer response to pricing, deals with the presentation of
prices to the buyer. It says that buyers may alter their reference
prices in different situations.

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When a high price product is introduced in a product line then the
buyer perceives the other less expensive products and worthwhile.

The fifth buyer response to price elaborates on how buyers react to
different prices in the prospect theory, i.e. “buyers evaluate prices
in terms of gains or losses relative to their present status, with a
particular loss being judged as more painful than an equivalent
gain.”(Skouras et al., 2005) For example Nagle and Holden (1995)
in their book illustrate, if station A sells fuel at $1.30 per gallon
and gives $0.10 discount if the customer pays in cash, while station
B sells fuel at $1.20 and charges a surcharge of $0.10 when a
customer pays with a credit card, then the customer would prefer to
fill fuel from station A.

The sixth approach by as talks about assimilation and contrast
theory i.e. consumers either contrast or assimilate the price levels
encountered in the market place with their reference prices. For
example, offers like ‘was Rs 100, now Rs 70’ is more appealing
than ‘was Rs 100, now Rs 85’.

Marketing challenges the belief that buyers’ have complete
knowledge about prices offered in the market. Empirical study by
McGoldrick and Marks (1987), as cited in Skouras et al. (2005)
proves that consumers lack the ability to recall prices of frequently
purchased products. Hence it can be inferred that consumer do not
pay attention to price for those products and services they
frequently purchase.

Estelami et al. (2001) as cited in Skouras et al. (2005) has
conducted a meta-analysis to investigate the macro-economic
factors that determine consumer price knowledge and established
that with increase in GDP growth rate and with the course of time,
buyers find it difficult to recollect prices of products or services.
They have also studied that the interest rates prevalent in the
econo my has no effect to the recollection of price by consumers.

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THE MARKETING MIX

In marketing, pricing needs to placed in perspective along with
other components of marketing. Developed by E. Jerome McCarthy
the marketing mix (refer to figure 2.1) is a tool used by managers
to develop their marketing strategy. Managers use this model to
attract their clientele by blending the four different variables in an
effective way. Many practitioners across the world believe that the
four P model assists managers to decide on the product and its
characteristics, set the price, decide how to distribute their product
and choose methods of promoting their product.

Figure 2. 1: Four P’s of Marketing Mix.

Kotler et al (1996) elucidates price as the amount of money
charged for a good or service i.e. it is the sum of the values
customers exchange for the benefits of having or using the product
or service. Pricing decisions should take into account profit
margins and the probable pricing response of competitors.

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Pricing includes not only the list price, but also financing and
other options such as:

Pricing strategy (skim, Cash and early payment
penetration, etc.) discounts
Suggested retail price Seasonal pricing
Volume discounts and Bundling
wholesale pricing Price flexibility
Price discrimination

Each of these four P's is controllable and is subjected to the
internal and external constraints of the marketing environment.
Many regard price as an important component of marketing mix as
it the only element that generates revenue, while the others
represent cost. Nevertheless pricing is controllable in an
unregulated market. Pricing should be in harmony with the other
components of the marketing mix which requires an integrated
marketing strategy. Hence, organisation may charge a high price if
the marketing team strategizes to capture a niche market.

Pricing and price competition are vital problems that managers face
due to a lack of understanding when compared to other components
of marketing mix. Often managers change their prices too fast
without proper analysis of the situation. Sometimes prices are
extremely cost oriented and do not take into consideration the
market scenario, while sometime prices are extremely market
driven and do not take market into consideration. An organisation
can fail in its long-term sustainability if the pricing strategy
adopted is not right. Many authors add that marketing has delved
into psychology so as to gain insight into how buyers perceive and
evaluate prices.

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Given below are the empirical results on pricing research carried
out by various authors some of which are cited in Skouras et al.
(2005).

Coulter (2001), Estelami (1999), Gendall et al. (1997) and
Gendall (1998): Consumers prefer odd prises (Rs 199) than even
prices (Rs 200).
Fearne et al. (1999), Kendrick (1998), Madan and Suri (2001),
McGoldrick et al. (2000): Price promotions such as price
discounts and coupons and their effectiveness on sales.
Hsu and Liu (1998): Moods play a role in price promotions.
Maxwell (1999): Price increase is perceived differently by
gender and cultural differences.
Huber et al. (2001): Buyers satisfaction depends on the
acceptance level of price as fair.

Marketing has adopted various facts and notion of pricing from
economics. The difference between economic concept of pricing
and marketing concept of pricing is that economics bases its
research on statistical data of market transactions; while marketing
has opened itself to insights from empirical data and psychology.
Marketing takes up a behaviourist approach to pricing, which is
practical, functional and elastic, where as economics is stuck to its
principle of utility-maximisation which not based on empirical data
from psychology.

2 . 3 . 2 H o t e l s D e t e r mi n a t i o n o f P r i c e s

In a dynamic market, organisations have been accused of adopting
pricing from both marketing and economic perspective. On review
of economic literature one can deduce that formal models seek
pricing to yield the optimum or maximum result. They further
elaborate that as per economic theories, the primary aim of
organisations is to maximise on profit.

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Price is also determined by different forms of competition:

a) Perfect Competition
b) Imperfect Competition

The concept of imperfect competition is described extensively by
an English economist Joan Robinson (1903 – 1983) in her work
“The Economics of Imperfect Competition”. According to economic
theories imperfect competition is a market situation that displays
characteristics different from market situation that of perfect
competition. Perfect competition as opposed to imperfect
competition has the following characteristics:

1. Large Number of Buyer and Seller where no single seller has the
capability to influence the market price by varying respectively
his supply and,
2. Homogenous Product i.e. the products and services produced by
different organisations should be standardised or identical.
3. Perfect Knowledge: the buyers and sellers are aware of the
prices that are being offered in the market.
4. Absence of Transportation Costs: If the transportation cost
features, then prices would differ in different sectors of market.
5. Perfect Mobility of the factors of Production: It is essential to
enable the organisation and the industry to attain a balance by
adjusting the supply to demand.

Unless all the mentioned criteria are fulfilled, it leads to imperfect
competition in the market. Imperfect competition can also occur
due to a time lag in a market. For example there are plenty of
growth opportunities available after a recession. It takes the
employees a while to react, leading to high unemployment. High
unemployment decreases wages, which makes hiring more
attractive, but it would take time for new jobs to be created.

17 | P a g e Lehry, A. (H‐1270)


Imperfect competition can take varied forms as seen below:

Figure 2. 2: Forms of Imperfect Competition.

The subject of imperfect competition brings about several issues
regarding pricing policies of imperfectly competitive
organisations. Pricing under perfect competition and pricing under
imperfect competition has significant differences.

MONOPOLY

Monopoly is defined as the market form in which a single producer
controls the whole supply of a single commodity which has no
close substitutes. Monopoly is thus characterised by a lack of
economic competition for the good or service in the market (i.e.
only one seller and the seller may be an individual, a firm of
partners or a joint stock company) and that there is no threat of
substitution from other or better products.

Under monopoly the distinction between the firm and the industry
disappears. In contrast with perfect competition where no single
seller has the power to influence the price of his commodity by
changing his own supply, in monopoly the monopolist can
influence the price. In monopoly the monopolist sets the price in
the market.

18 | P a g e Lehry, A. (H‐1270)


The monopolist is in complete control of the supply of his product
in the market and hence the monopolist can set prices in two ways

1. The monopolist can fix the price and offer to supply the quantity
demanded at that price or
2. The monopolist can fix the supply and then let the price be
determined by the demand of his product in the market.

Interestingly, monopoly price is not necessarily the highest price.
Due to the absence of competition the monopolist does not have to
invest in advertising and hence this cost is ruled out. The
monopolist gains from the economic condition as it results in large
scale production. This form of market also ensures that the seller
can demand his price for the product (the seller can practice an
independent price output policy) and that the seller does not
undergo price pressure from competition. “Power to influence price
is the essence of monopoly”, Dewett and Varma (2005).

OLIGOPOLY

Oligopoly is derived from the Greek words ‘Olig’ and ‘poly’ which
stand for ‘a few’ and ‘sellers’ respectively. Oligopoly is a market
form where there are a few sellers. Hence, each seller is aware of
the actions of the other sellers. The decisions of one firm persuade,
and are influenced by the decisions of other firms.

Pricing in oligopoly depends on the following characteristics:

1. Interdependence: Since there are a few sellers in the market the
price output decision of one seller is takes into consideration by
other sellers which influences their decision making on pricing.
2. Intermediate demand curve: No seller can be certain about the
quantity of product he can sell at a price, as in this market form
it is difficult to predict the behaviour of other sellers on the
price output decision, leading to uncertainty. Thus the demand
curve is intermediate.

19 | P a g e Lehry, A. (H‐1270)


3. High Pressure Salesmanship: The seller in the market invests in
advertisement to capture the market effectively as there are
other sellers present in the market. Thus the other sellers also
display a tendency to increase their selling cost as a counter
campaign measure, affecting their pricing decision.
4. Sticky Prices: The sellers in the market do not indulge in
changing the price of their commodity as it will avoid
unfavourable response from competitors. Hence there is
comparative price stability in an oligopoly market.

From the above characteristics of oligopoly it can be inferred that
no single price output decision is possible as the decision of one
seller affects the price decision of the others. Strategic planning by
oligopolists always involves taking into account the likely
responses of the other market participants. This causes
oligopolistic markets and industries to be at the highest risk for
complicity.

MONOPOLISTIC COMPETITION

In the real world monopoly and perfect competition rarely exist. In
general there are a large number of sellers / producers but not as
large in the case of perfect competition. Secondly the products
produced by the firms are not homogenous i.e. they are
differentiated by the means of different labels and brands. Both
these above characteristics of present day market do not fulfil the
conditions for monopoly or perfect competition. It is monopolistic
because each brand in itself is a different product and is produced
by a single firm; there is competition among different firms who
produce similar products; and it is imperfect as prices are
influenced by the actions of different firms in the market.

20 | P a g e Lehry, A. (H‐1270)


The characteristics of "monopolistic competition" are:

Many buyers and sellers (not as large as perfect competition)
Differentiated products
Sufficient knowledge of the market i.e. producers have a degree
control over price.
There are few barriers to entry and exit.

Monopolistic markets include firms like restaurants, cereal,
clothing, shoes and service industries in large cities. From the
works of Dewett and Varma (2005) it can be inferred that, given
that competition is imperfect and price of products varies in the
market i.e. the market is split into different segments where each
product excels and attracts its own clientele. Each of these
segments displays monopoly and accordingly the price for the
product is determined. The demand for each good is not perfectly
elastic. Monopolistic firms command brand loyalty and therefore
are not price-takers. Under this form of competition, total product
equals the sum of marginal cost and marginal revenue.

Hall and Hitch (1939) as cited in Skouras et al. (2005) present a
contrary view through their research that organisation do not target
profit maximisation nor do they base their price on marginal
analysis. This led them to develop the theory using full-cost
pricing approach to set their prices. Taking this further Andrew
(1949) also cited in Skouras et al. (2005) developed normal-cost
pricing i.e. prices is based only on variable costs at the targeted or
normal level of capacity utilization.

21 | P a g e Lehry, A. (H‐1270)


Thus an organisations pricing is primarily dependent on processes
by which prices are determined and behavioural examination of
issues such as pricing objectives, pricing methods followed (i.e.
cost-based, demand-based and competition-based), the pricing
policies adopted (i.e. list pricing, negotiated pricing, geographical
pricing, price bundling etc.), factors that affect pricing (service,
organisational and environmental) and the departments responsible
for pricing decision related to pricing of existing and new products
and the examination of the health of the company in general to
determine an increase or decrease in price.

Skouras et al. (2005) draws a parallel between in the fields of
economics and marketing. Economics considers pricing to the
essence of business decision in-order for profit maximisation,
while marketing regards pricing as important as the other
components of the marketing mix and is behaviourist in approach.
Economics is supported by the fact that there is no discrepancy
between general equilibrium theory and firms’ determination of
prices except on the basis of profit maximisation.

2.3.2 Industry and Economy Wide Role Process

Industry and Economy wide process is of great significance to
economics and has no part to play in marketing. There are a number
of vital questions that have formed economic research.

The question that arises at the sector level is regarding structural
characteristics, the intensity of competition in the market and how
the competition if performing, Skouras et al. (2005). In the 1930’s
and 1950’s American economists made immense contribution to the
field of economics by defining a separate branch known as
industrial economics, the foundations of which had been laid by
Marshall (1920).

22 | P a g e Lehry, A. (H‐1270)


The main concepts of Industrial economics are economies of scale,
barriers to entry or exit from a market, governmental intervention
through price and other controls, vertical integration,
diversification, product differentiation and different forms of price
competition in oligopolistic market situations, McGee (1988),
Scherer (1980), Tirole (1989) as cited in Skouras et al. (2005).
Under this industrial organisation approach pricing is determined
on the understanding of how the nature of competition affects
pricing behaviour and is not evaluated at an organisation level.

The economy-wide level consists of two approaches; general
equilibrium analysis and macroeconomics. In general equilibrium
analysis prices are determined after the equilibrium price is set.
Though this concept remotely exists it consists of neoclassical
economics. Macroeconomics is empirically oriented where the
determination of price takes place taking into consideration
consumption, investment, the rate of interest, income and
employment. Macroeconomics and general equilibrium theory
resemble each other with the exception that the primary variables
are different.

General equilibrium theory consists of microeconomics such as
utility-maximisation consumers and profit maximising organisation
under perfect competition, while macro economics is concerned
with empirically observable counterparts. The pricing system under
these two approaches is empirically not observable.

Marketing has nothing to chip in to the issue of industry and
econo my wide role of pricing where as economics has its theories
centered on the issue of price determination.

23 | P a g e Lehry, A. (H‐1270)


As mentioned by Skouras et al.(2005) that marketing as a study
originated out of business concern to align management with the
market and its chief aim is to enhance business performance, where
as economics originates from political philosophy and strives to
the organisation of society. Thus, marketing is a discipline
concerned with business practice while economics is essentially a
social science discipline.

As cited in Avlonitis and Indounas (2006), “price management is a
critical element in marketing and competitive strategy and a key
determinant of performance. Price is the measure by which
customers judge the value of an offering and it strongly impacts
brand selection among competing alternatives.” (Shipley and
Jobber 2001)

2.4 Bargaining Theory of Pricing

There exists more than one price for a product in the market due to
bargaining. This difference in pricing is be present not only due to
competitors but is also caused by sellers in the market who charge
who charges different prices. Moyer (1971) points out that these
circumstances are opposite the traditional pricing theory (perfect
competition) that the presence of more than one price in the market
is not possible. This situation is created due to the unwillingness
of rational buyers to pay more than the prevailing price in the
absence of extraordinary circumstances (for example coercion).

In our daily life we have experienced that different prices are
being charged for a product of service due to bargaining. A walk-in
guest is usually asked to pay at the rack rate for his stay while a
corporate guest is charged a different rate (corporate rate) as his
company has a contracted rate with the hotel. This happens due to
bargaining power of the buyer.

24 | P a g e Lehry, A. (H‐1270)


Similarly many other segment of guests are charged differently due
to their individual bargaining power, travel agents bargaining
power, bargaining power of groups and MICE. Most deliberate
price discrimination schemes fall into this category. The
management seek out to create different markets between which the
service is almost non-transferable. Hence, what appears to be
different prices in a single market is in fact individual prices in
different market segments.

Moyer (1971) further elaborates that for identical products in
imperfect markets other factors such as imperfect knowledge,
indifference to the availability of lower or higher prices, advantage
due to location are the causes to charging different prices. He
states that it is an organisation’s lack of power to affect prices that
gives way to bargaining power of the buyer as in case of hotel
industry in Sri Lanka where that travel agents dominate the lodging
industry by providing hotels with business at a rate feasible to
them due to the political instability of the country. He also
elaborates on the fact that in perfectly competitive market no
organisation is commanding enough to influence price in an
obvious manner. Whereas on the other hand a monopolist avoids
bargaining as his market position makes him extremely powerful
and he can do without it. The monopolist is the sole seller in the
market and the buyers are compelled to accept his price.

The concept of bargaining persists in all types of markets such as
oligopoly, monopolistically competitive but the question now
arises as to what determines bargaining power.

The determinants of bargaining power are listed as follows:

1. Market structure: It involves the number and size of buyers and
sellers. The bargaining power of the sellers is weak when many
sellers are present in the market as the consumer has the
alternative to approach another seller.

25 | P a g e Lehry, A. (H‐1270)


When the market consists of few buyers then the seller are
profoundly dependent on them for benefaction. In this case also
the bargaining power of buyer presides over the bargaining
power of sellers.

2. Availability of close substitutes: Competition in the market can
take place directly or indirectly. Sellers who sell close
substitute of products area small step away from being direct
competitors. Substitution of an existing product is often an
outcome of changes in production processes and through design
changes or because substitution bring about profitability in the
short run. In both the cases substitute product concern buyers
and sellers and have an effect on bargaining positions either
explicitly or implicitly.
3. Level and trend of demand: Buyers bargaining power is
weakened when the sellers demand for a product increases. The
seller benefits by narrowing of operating rates which usually
follows increased demand. In this situation a seller might
reinforce his bargaining position by increasing the spot delivery
price or he may capture new business from troubled buyers who
evaded him in the past.
4. Perishability: As in case of hotels a room which is unsold on
any particular night cannot be stocked to subsequently offer to
guests at a later stage. Hence the consumer can take advantage
of this fact that in case of low demand the organisation is
constrained to make price deduction without duress.
5. Financial resources of the participants: In times of financial
crisis the buyer attains that bargaining power as a seller would
not want to lose out on business when the business is tough to
secure and the organisations future is uncertain.
6. Bargaining skill and effectiveness of buyer and seller: This
factor is firstly dependent upon the eagerness to exercise one's
bargaining power.

26 | P a g e Lehry, A. (H‐1270)


This difference between effortless and tough bargainers take
places more on the buying than on the selling side in industrial
purchasing situations. The opposite phenomenon is seen in retail
consumer goods markets. Secondly knowledge of market
condition knowledge of the extent of the competitors bargaining
power is also important. For example: when a travel agent is
aware about the special deals accessible to his competition, then
he can also demand the same concessions. The knowledge of the
sellers cost allows the buyer to enquire the seller on high prices,
thus giving the buyer a bargaining power over the seller. Finally
the bargaining effectiveness is also influenced by experience.
An expert bargainer knows when to cling on to a situation, what
price to extract and how best to persuade.

Moyer (1971) through his research brings out that though
bargaining is important it would be a mistake to overstress on this
it not the only controlling factor of pricing. Price bargain may
occur in basic operational environment faced by the buyer and
seller. In favourable market conditions the buyer or the seller will
make complete use of their bargaining advantage. It is a
permutation of various factors that encourages the fascinating
phenomenon of sellers commanding different prices for a particular
product in a single market. Price-bargaining generally exists
between wholesaler and retailer or producers and manufacturer's
agent.

2.5 Price in Service Organisations

Service industry products in comparison with manufacturing
industry products are often associated with intangibility,
inseparability, heterogeneity and perishability, which require
different and effective marketing strategies.

27 | P a g e Lehry, A. (H‐1270)


A study of 323 service organisations in the 1980’s, demonstrated
that at an average, service organisation practised cost-based
pricing more often that competition-based pricing, Zeithaml et al.
(1985) as cited in Finch et al. (1998). It was also observed that
service organisations found it difficult to reduce price in low
demand period to take in volume business. It was identified that
during fluctuating demand period organisations handled the
situation with supply oriented strategy such as overtime, cross-
training or part-time rather than adjusting their pricing according
to the demand situation in the market, as low price was usually
perceived with depreciation in quality. Price is a tangible aspect of
quality; hence it was considered important to maintain a high price.

Finch et al. (1998) contradicted Palmer and Cole by
conceptualising the strategy of highlighting demand curve by
periods of peak, lean and shoulder. They said that to cover the
challenges of fluctuations in demand by inducing consumers to use
services voluntarily, thus avoiding the perception of lower quality.
The strategy of simultaneous actions to manipulate demand and
supply to accomplish a balance was suggested by Sasser (1976).

Service industry is challenged by the element of perishability of its
products (such as rooms, food and beverage material etc). A room
unsold at a particular night cannot be accumulated to be
subsequently offered to a guest at a later date.

Thus, selling each room each night at the best possible price is
critical to a hotel’s long-term success. The goal here is to
maximise on the revenue at point in the demand curve. Hence,
decrease in prices is necessary due to the perishable nature of hotel
industry products and / or services and is similar to the price
dynamics of perishable products; this nature of pricing is similar to
pricing dynamics of products close to expiration.

28 | P a g e Lehry, A. (H‐1270)


2.5.1 Selecting a Pricing Method

Pricing methods refer to the basic principles used in order to
charge a price. These principles can range from mathematically
calculated ones (example break-even analysis) to rather
uncomplicated ones (example pricing according to the market’s
average prices). Furthermore, the intricacies of pricing decisions
promote the need to implement more than one pricing method. For
example, a specific pricing method may be used in everyday
pricing decisions, while another pricing method may be adopted in
some special circumstances.

After the extensive review of literature on service pricing the
following are the pricing methods classified. The classification is
adopted from Avlonitis and Indounas (2005). Pricing methods are
usually determined after analysing demand, estimating cost,
analysing competitors cost, pricing and offers.

COST-BASED METHODS

Cost-plus method: cost + profit margin.

Target return pricing: the price is determined at the point that
yields the firm’s target rate of return on investment.

Break-even analysis: determination of price at a point where total
revenue is equal to total cost.

Contribution analysis: Only direct cost of product is considered to
determine its price, a deviation from break-even analysis.

Marginal pricing: price is determined to cover marginal costs only.
Hence price is usually set below total and variable cost.

COMPETITION-BASED METHODS

Pricing similar to competitors or according to the market’s average
prices.

29 | P a g e Lehry, A. (H‐1270)


Pricing above competitors.

Pricing below competitors.

Pricing according to the dominant price in the market: the leader’s
price that is adopted by the rest of the organisation in the market.

CUSTOMER-BASED PRICING

Perceived-value pricing: price is determined after obtaining
information on customers’ perception of product / service value.

Value pricing: a fairly low price is set for a high quality service.

Pricing according to the customers’ needs.

2.5.2 Selecting a Pricing Policy

Oxenfeldt (1983) as cited in Avlonitis and Indounas (2007) defines
pricing policies as the particular actions and procedures necessary
for reaching the final price. He also elucidates that pricing policies
can help to attain stability and validity in an organisations pricing
practice and present solutions to unanticipated pricing situations.

According to Avlonitis and Indounas (2007) the empirical research
conducted on pricing policies in service organisations is limited.
Some of these pricing policies are applicable to a specific service.

For example yield management policy is extensively used in hotels
and airlines where as the other policies are used by used by many
service organisations.

After the extensive review of literature on service pricing the
following are the pricing methods classified. The classification is
adopted from Avlonitis and Indounas (2006)

List pricing: Price is determined without differentiating it
according to the different market segments that the company
might target.

30 | P a g e Lehry, A. (H‐1270)


Differentiated pricing: Charging different prices to different
customers on the basis factors such as the time of the purchase,
the place of the purchase or consumption of the service and the
customers’ personal characteristics.
Geographical pricing: Charging different prices to customers
that are located in different geographical locations.
Negotiated pricing: Price is determined on the basis of
individual agreements between the company and its customers.
Quantity discounts: Price discounts for those customers that
purchase large quantities.
Cash discounts: Price discounts for those customers that pay
their total amount within a pre-determined time period.
Trade discounts: Price discounts to agents and distributors in
order to promote and support the product or service.
Loss-leader pricing: Charging a low price for service in order to
attract customers that will be offered other more profitable and
higher-priced services.
Image pricing: Price is set high in order to convey an
exclusivity image.
Pure bundling: Bundling of such services which cannot be
purchased independently and is offered at a reduced price.
Mixed bundling: Bundling of two services that can be purchased
independently and is offered at a reduced price.
Relationship pricing: An approach which aims at developing
long-term relationships with customers, understanding their
needs and pricing according to these needs.
Yield management: Price is determined by analysing different
market segments’ demand and charge maximum price to
segments that they are willing to pay along with managing the
existing capacity.
Efficiency pricing: Price is determined in-order to lower the
company’s cost to a minimum level (For example through the
adoption of sophisticated technologies) that will continually

31 | P a g e Lehry, A. (H‐1270)


permit the determination of low prices for those customers that
are price-sensitive.

2.5.2 Environment

After an extensive review of pricing literature now let us focus on
what influences pricing. Determination of pricing involves analysis
of both inward (company-oriented) and outward (environmentally
oriented) characteristics. The inward characteristics can be further
divided into service (i.e. cost) and organisational characteristics
(organisational goals, marketing objectives etc), Avlonitis and
Indounas (2006).

According to Lovelock (1996) cost, competition and customer-
based characteristics, which he refers to as tripod, are crucial
when, determining prices. He prioritises these characteristics such
that the value that the customers attach to the service or their price
elasticity forms the ‘ceiling’ of the tripod, whereas competitors
characteristics (i.e. their prices or their expected reactions) is
placed in the middle of the tripod. A good understanding will help
the organisation to narrow down on a price that is acceptable both
by the organisation and customers.

Macroeconomic characteristics, the corporate marketing strategy
and objectives, the market structure, Service innovation etc also
have an influential affect in determining prices.

Shipley and Jobber (2001) as cited in Avlonitis and Indounas
(2007) have said that a blend of service, organisational and
environmental characteristics help to determine effective pricing
strategy.

32 | P a g e Lehry, A. (H‐1270)


There have been few empirical studies that prove that cost is the
main determinant of pricing decision, while a study conducted by
Segal (1991), as cited in Avlonitis and Indounas (2006), of 103 US
accounting firms has established that time required to complete the
job was of primary concern in determining correct pricing strategy.
To support this Meidan and Chin (1995), as cited in Avlonitis and
Indounas (2007), say that cost and competitors prices are the two
main determinants of pricing.

Since cost and organisational characteristics are by far controllable
by the organisation, environmental characteristics are something
that organisations need to watch out for. Therefore, this research
would focus on environmental characteristics. In this dynamic
environment with immense growth opportunities organisation need
to be aware about the change in the business environment in-order
to tap the right resource (market segment), analyse the current and
future requirements of the market and deliver it at an optimal price
so as to maximise their revenue.

After the extensive review of literature on pricing strategies the
following are environmental characteristics classified. The
classification is adopted from Avlonitis and Indounas (2007). The
researcher has classified them into Economic and Market factors.

ECONOMIC FACTORS

The existing level of the interest rates: The existing interest
rates in the country formulated by the central bank.
The future expected level of the interest rates: The predicted
changes in the interest rates.
Other macroeconomic characteristics: A change in characters
such as GDP, unemployment rates, growth rates, inflation, etc.
The level of governmental intervention: The extent to which
government interferes in an industry’s pricing practices.

33 | P a g e Lehry, A. (H‐1270)


The existing regulation regarding pricing practices: The laws
associated with specific pricing practices such as pricing below
cost, price collusions and price differentiation.

MARKET FACTORS

The process that customers adopt in order to evaluate the
service: Criteria such as price, fame, and customer service that
customer’s use for judging the service’s outcome.
The value that customers attach to the service: The costs (i.e.
monetary, psychic, energy, time) that customers must incur vs.
the benefits associated with obtaining the service.
The customers’ personal characteristics: The demographic of
the customers.
The distribution channel that customers use: The extent to
which customers purchase the service via internet or telephone.
The customers’ price elasticity: The customers’ purchase
behaviour.
The competitors’ prices.
The existing Brand value in society.
The expected competitive reactions: The competitors’ responses
to the company’s price initiatives.
The threat of new competitors entering into the market.
The intensity of competition among the existing companies.
The threat from substitutes: The extent to which there are
similar but not identical services.
The buyers’ bargaining power: The extent to which customers
can impose their will when making business with the company.
The suppliers’ bargaining power: The extent to which suppliers
can impose their will when making business with the company.

34 | P a g e Lehry, A. (H‐1270)


2.6 Conclusion

A hotel manager repeatedly seeks the best strategy to set their
prices for profit. Within this context they need determine whether
an increase in price would cause their customers to stop purchasing
their hotel rooms and send them to a competitor or whether a price
discount initiated by their competitor would cause their customers
to switch from their property to another. Thus, begins the race to
price your hotel room’s right.

The researcher through this chapter has brought out pricing from
the point of view of economics and marketing, the difference being
in the origin, mission centrality of theory and doctrinal evolution
of the two disciplines. Marketing takes up a behaviourist approach
to pricing while economics it glued to its principle of utility-
maximisation. Economics considers pricing to be the essence of
business decision in-order for profit maximisation while marketing
regards pricing as important as the other components of the
marketing mix.

It is evident that environmental characteristics and pricing
strategies have been studied extensively from an empirical and
theoretical perspective. Thus, from the literature of pricing
strategy it has emerged that service, organisational characteristics
and environmental characteristics influence the pricing strategy of
any organisation. Since cost and organisational characteristics are
by far controllable by the organisation, environmental
characteristics are something that organisations need to watch out
for. Therefore, this research would focus on environmental
characteristics. In this dynamic environment with immense growth
opportunities organisation need to be aware about the change in the
business environment in-order to tap the right resource (market
segment), analyse the current and future requirements of the market
and deliver it at an optimal price so as to maximise their revenue.

35 | P a g e Lehry, A. (H‐1270)


Chapter 3: Research Methodology

3.1 Introduction

The intent of this chapter is to highlight the research methodology
implemented by the researcher to establish a framework for the
dissertation. After having identified the pricing strategy and
environmental characteristics as the research variables, this chapter
furthers explains the research tools adopted for carrying out the
primary research and evaluating the hypothesis derived from the
secondary research.

3.2 The Research Purpose and Framework

The purpose of this study is to investigate how changing
environmental characteristics affect the pricing strategy of hotels
in India. In order to arrive at a comprehensive conclusion at the
end of the research the researcher has utilised descriptive,
hypothetico-deductive methodology.

Descriptive research is designed to describe the characteristics or
behaviours of a particular sample in a systematic and accurate
fashion. It is also referred to as non-experimental or correlation
research. Descriptive research is used to acquire information
concerning the current status of the phenomena to describe "what
exists" with respect to variables or conditions in a situation. In
context to this research descriptive research is used to identify the
pricing methods and policies used in the Indian Hotel Industry in
the current environmental scenario. The method involved is
developmental studies which seek to determine changes over time.

There have been various attempts by authors to define research but
the most widely accepted definition of research is stated by
Sekaran (1992).

36 | P a g e Lehry, A. (H‐1270)


She states that:

“Research can be defined as an organised, systematic, data based,
critical, scientific inquiry or investigation into a specific problem,
undertaken with the objective of finding answers or solutions to
it.”

This research is an effort to identify the pricing strategies adopted
by Indian hotel industry and understand the environmental context
in which these pricing strategies are applied in order to maximise
on revenue generation. Further the researcher will delve into the
concept of pricing as the key element of the three discipline i.e.
revenue management, economics and marketing.

The preliminary step in this process is to examine where the
problem lies and to gather information regarding the same.
Focussing on the basic perspective the researcher attempts to
understand pricing strategy from the point of view of revenue
management, economics and marketing as the key element that
determines the long term success of a company. The researcher
uses information from other research articles and books published
on the subject of pricing to conceptualise that problem domain,
which is carved out in the literature review.

The argument presented in the literature review will be tested to
through personally administer questionnaire (qualitative
technique). The data obtained would be processed to find
similarities and dissimilarities amongst various respondents in
their practices to arrive at comprehensive conclusion regarding the
issue.

The framework of the research is diagrammatically represented in
the next page.

37 | P a g e Lehry, A. (H‐1270)


Figure 3. 1: Proposed Research Framework

38 | P a g e Lehry, A. (H‐1270)


3.3 The Research Process

Sekaran (1992) distinguishes research into two basic types
according to its purpose. One aim of research is to decipher an
existing problem in the working environment and the other goal is
to add value to the knowledge bank of a particular subject of
significance to the researcher. She states that when research is
used to employ the final results to crack specific problems
currently being experienced in the organisation, it is known as
Applied Research. Nevertheless, when research is primarily
conducted to enhance our understanding of certain issues that
commonly occur in organisational setting and how to solve them,
then it is referred to Basic, Fundamental or Pure research.

Research consists of logical steps of well reflected and carefully
performed activities that allows the researcher to know how the
issue on hand can be analysed, constructed and resolved. It is a
systematically planned and structured approach to investigate a
specific problem that needs a solution. Research thus encompasses
the process of inquiry, investigation, examination and
experimentation.

This research being academically inclined, wish to operationalise
its findings from literature review to the real world scenario. The
researcher as proposed earlier, has employed the hypothetico-
deductive research methodology keeping in mind the scope and
limitations of this research to guarantee strength in the results.
This research will be empirically tested from the Indian hotel
industry and the basket of sample would include revenue managers
from prominent hotel chain (Taj group of hotels, Hyatt and
Marriott’s India Pvt Ltd).

39 | P a g e Lehry, A. (H‐1270)


3.3.1 Hypothetico-Deductive Method

The hypothetico-deductive research method involves seven
different stages. For the ease of understanding the researcher has
diagrammatically represented (in figure 3.2) the flow of this
research method. The researcher has described in detail the
research on hand in accordance to the hypothetico-deductive
research method.

F i g u r e 3 . 2 : H y p o t h e t i c o ‐ D e d u c t i v e r es e a r c h m e t h o d a d o p t ed f r o m S e k a r a n ( 1 9 9 2 )

OBSERVATION STAGE

This is the first stage of research where the one senses that certain
changes are taking place, or that some new behaviours, attitudes
and feelings are emerging in the environment. In this context the
researcher has learnt from the literature that all the three
disciplines revenue management, marketing and economics lay
emphasis on pricing practices as the key driver of an organisation
profitability and long-term success. Pricing is perhaps the most
difficult marketing task for businesses big or small. A hotel room
which is unsold on any particular night cannot be stocked to
subsequently offer to guests at a later stage.
40 | P a g e Lehry, A. (H‐1270)


Thus, selling each room each night at the best possible price is
critical to a hotel’s long-term success. Now how is this best
possible price achieved? The best possible price is determined by
various factors such as organisational goals, the market in which
the organisation exists, the financial state of the organisation and
the products and services of the organisation. With changing time
the business environment also changes and demands different
requirements from an organisation. It is how well the organisation
reads the changing requirements of the environment and caters to it
through innovation and pricing. This dissertation will concentrate
on the pricing aspect rather than innovation.

PRELIMINARY DATA GATHERING

This stage of the research encompasses of seeking of information
to know more about one observed. Sekaran (1992) has stated that
preliminary data can be gathered through secondary data.
Secondary data consists of copyright articles and e-books and
books available from sources such as publication (published or
unpublished) and library research.

To gather necessary data, the researcher explored many search
engines and information databases such as Google, Science direct,
Sage publication, EBSCO electronic journal and services, e-brary,
Emerald Full text, The Center for Hospitality Research, etc. by
typing key words ‘pricing + pdf’, ‘pricing of services + pdf’,
‘pricing of service organisations’, ‘pricing strategy of service
organisations’, ‘service pricing’, ‘factors affecting pricing of
service industry’, ‘principles of pricing’, ‘environmental factors of
business’, ‘strategic pricing’, ‘pricing in imperfect competition’,
‘marketing and pricing’, ‘economic theories of pricing’, etc. in the
search engines.

41 | P a g e Lehry, A. (H‐1270)


The researcher has collected a large quantity of information on
pricing strategy and environmental characteristics from various
authors such as Avlonitis and Indounas (2005), Cross, R.G (1997),
Dewett, K.K and Varma, J.D. (2005), Maxwell, S. (1999), Moyer,
R. (1971), Kasavana and Brooks (1996), Skouras et al. (2005),
Finch et al. (1998), Lovelock, C.H. (1996), etc.

The information was gained from the above mentioned information
databases from the ATHENS database through various journals such
as Journal of Services Marketing, Journal of Product & Brand
Management, European Journal of Marketing, The Service Industry
Journal, etc.

The method of ‘snowballing’ was used to find relevant articles
which were researched by other authors mentioned in the
references. The authors name and the article title was typed in the
Google search engine to procure these articles. For those articles
that could not be procured by this method due accessibility issue,
the email address was obtained through Google by typing the
authors name and / or university name + email address or other
similar combination.

THEORY FORMULATION

Once the relevant data is gathered the next step of action is to
review the literature available on the subject of concern and form
the literature review. According to Sekaran (1992), a theoretical
framework is a conceptual model of how one hypothesises the
relationships between the factors considered for study. Theory
formulation integrates all the information in a logical manner, so
that the determinants for the issue can be conceptualised and
tested.

42 | P a g e Lehry, A. (H‐1270)


Variables

At this stage significant variables are scrutinized as to their
contribution or influence in explaining why the problem occurs and
how it can solved. The case is segregated into dependant and
independent variable, which are of primary interest to the
researcher and constitute the main variables of the hypothesis.

Dependent Variable: This variable is of primary interest to the
researcher. It is the key variable that lends itself as a viable
factor for investigation. It is possible to find solution to the
problem in hand through this variable, Sekaran (1992). In this
research the dependant variable is ‘Pricing Strategy’.
Independent Variable: This variable influences the dependent
variable either in a positive or negative manner. The variance
in the dependent is accounted for by the independent variable,
Sekaran (1992). Hence, the independent variable in this research
is identified as ‘Environmental Characteristics’.

HYPOTHESISING

Sekaran (1992) defines that, “a hypothesis is logically conjectured
relationship between two or more variables expressed in the form
of testable statement based on a network on of associations
established in the theoretical framework formulated for the
research study.”

A hypothesis is an educated guess about a problem’s solution. It
logically builds a relationship between the variables in order to
form a testable proclamation.

43 | P a g e Lehry, A. (H‐1270)


As learned from the literature review that an organisations pricing
is primarily dependent on processes by which prices are determined
and the behavioural examination of issues such as pricing
objectives, pricing methods followed (i.e. cost-based, demand-
based and competition-based), the pricing policies adopted (i.e. list
pricing, negotiated pricing, geographical pricing, price bundling
etc.), factors that affect pricing (service, organisational and
environmental).

After studying relevant data and literature available on the issue
and keeping in mind the research aim and objectives, the researcher
has been able to generate the following hypothesis:

The hypothesis mentioned would be tested through qualitative
analysis considering the learning from the literature review.

FURTHER SCIENTIFIC DATA COLLECTION

Sekaran (1992) says that scientific data collection is necessary to
test hypothesis that is generated from the study. This data further
forms the basis for data analysis.

After formulating the hypothesis, data needs to be collected to
evaluate the extent of relationship between the two variables, gaps
is any and test the hypothesis. Data pertaining to every variable in
the literature review from which the hypothesis is generated should
be collected. This helps the researcher for further data analysis.

There are many ways to seek empirical data, the most common
methods being personal interviews, observation, document analysis
telephonic interview, email or regular mail, email survey or face-
to-face survey.
44 | P a g e Lehry, A. (H‐1270)


The researcher plans to test the proposed hypothesis in the Indian
hotel industry context. The researcher intends on capturing the
views of revenue managers from the prominent hotel chain such as
Marriott and the Taj group of hotels.

Research tools Applied

The research intends to examine the effect of change in
environmental characteristics on pricing strategies of hotels.
Specific questions have to be asked in order to effectively capture
their views on the above theme.

The researcher has used the qualitative method to conduct
empirical research. The data was secured by means of a
questionnaire.

Following the suggestions of many marketing research academics,
an effort was made to avoid leading and unambiguous questions,
paying particular attention to the wording and sequence of
questions and ensuring a professional style and format.

Pricing methods and Pricing Policy (Pricing Strategy)

In order to identify the pricing methods and pricing policy
practiced in the Indian hotel industry, the operationalisation put
forward by Avlonitis and Indounas (2005) and Avlonitis and
Indounas (2006) with regard to pricing methods and pricing
policies respectively was adopted. Data regarding pricing was
gathered in the form of open-ended question which is situation
specific.

Environmental Characteristics

In order to identify the change environmental characteristics that
influence pricing strategies practiced in the Indian hotel industry,
the operationalisation put forward by Avlonitis and Indounas
(2007) with environmental characteristics was adopted.
45 | P a g e Lehry, A. (H‐1270)


Data regarding environmental characteristics was gathered in the
form of:

a) A 5-point Likert scale reflecting the range of responses between
strongly disagree to strongly agree.
b) Open ended question which demanded the context in which the
change in environment characteristics would cause a change in
pricing.

Sampling

Sekaran (1992) defines sampling as “the method of selecting an
adequate number of elements from the population so that by
studying the sample and understanding the properties or the
features of the sample subjects, one can generalise the properties
or features of the sample subjects, one can generalise the
properties or features to the population element.”

It is the most important factor, which can determine the validity
and robustness as well as the destiny of hypothesis of the research.
The sampling of this research has been limited to the revenue
managers of hotels in Indian only. Keeping in mind the research
aims and objectives and the hypothesis to be tested, it was
necessary to make certain that the sample chosen for this research
is educated, knowledgeable about the research area and understand
the implication of both the aspects being compared, pricing
strategy and environmental characteristics.

The sample included revenue managers from Taj Mahal Palace and
Tower, Taj President Mumbai, Taj Lands End Mumbai, J W
Marriott Mumbai, Hyatt Regency Mumbai, J W Marriot Goa and J
W Marriott Hyderabad.

46 | P a g e Lehry, A. (H‐1270)


DATA ANALYSIS

The gathered information from empirical study is analysed in this
stage of the research, thus testing the hypothesis generated from
the literature review. Though the literature review has given
enough strength and insight on the issue and substantiates the
argument, it is not sufficient to arrive at a conclusion in this
research.

The data obtained through the questionnaire from the various
participants was fed into Microsoft Excel spreadsheet. The
responses were analysed for similarities and dissimilarities in
practices and this inference was used to arrive at a comprehensive
conclusion.

The environmental factors were analysed with simple average of
the degree of response for an element in the factors. Each element
was given a rating from 1 to 5 by the respondent. Then the rating
of each element by each respondent was added and further divided
by the total number of respondent to obtain an average rating of the
element.

CONCLUSION

The research methodology chosen to carry out a research brings out
the depth of the research, its strength in the development of the
research variables, recognising the factors which may affect the
research process and developing contingency plans to ensure that
the research does not lose track. Hence, as discussed earlier
hypothetico-deductive research methodology has been used with
qualitative analysis techniques.

The hypothesis generated through the literature review, keeping in
mind the aim and objective of the research, was tested against the
empirical research results, which paved a way to the conclusion
regarding the relationship between the two variables.

47 | P a g e Lehry, A. (H‐1270)


Chapter 4: Data Analysis and Interpretation

4.1 Introduction

The literature review has attempted to provide well-built
understanding of the issue and substantiates the argument, but it is
not sufficient to arrive at a conclusion on this research. The
gathered information from empirical study is analysed in this stage
of the research, thus testing the hypothesis generated from the
literature review.

In order to label a research process qualitative investigation means
that the research generally aims at understanding the meaning of
human action. The best way to express qualitative data is
nonnumeric data in the form of words. Rather than controlling
variables, qualitative research is open-ended and sets up research
opportunities designed to lead the researcher into unforeseen areas
of discovery with the area or topic of investigation. Qualitative
inquiry begins from the point of view that inquiry is a matter of the
perception of qualities of some object or event and an appraisal of
their value. Qualitative denotes quality, an inherent or phenomenal
property or essential characteristics of some object or experience.
Broadly speaking, qualitative methods are procedures including
unstructured open-ended interview, open-ended questionnaire and
participant observation that generate qualitative data.

As mentioned in the previous chapter the elements of the variables,
pricing strategy and environmental characteristics, have been
adopted from the research of other authors. The data collection
style with regards to the various elements has been modified to suit
the needs of this research. The research tool applied as been
discussed in detail in the previous chapter. Further this chapter
deals with review of responses of revenue managers and endeavours
to highlight their views pertaining to the issue of this research.

48 | P a g e Lehry, A. (H‐1270)

An Inquiry Into Pricing Of Hotels

An Inquiry Into Pricing Of Hotels

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