Influence of Cultural Heritage on Hotel Prices, Occupancy and Profit:

Theory and Evidence

This paper presents a theoretical model of a heritage hotel setting prices for two types of
hotel rooms, distinguished by their extant of heritage. We analyze the model using Game
Theory. We derive the profit-maximizing prices as a function of the differentiation
between the hotel rooms and the relative proportion of each type of hotel room. We also
measure the occupancy rate of each type of hotel room and the total profit made by the
hotel in response to the optimal prices. This paper also presents an empirical study of hotel
rooms located near the Eiffel Tower in Paris, France to complement the theoretical
analysis. We find that rooms offering a view of the Eiffel Tower are priced significantly
higher than rooms not offering this view. Moreover, the price premium imposed for the
heritage view is relatively higher at more expensive hotels.

Keywords: Pricing, Game Theory, Heritage, Hotels

1. Introduction
The Eiffel Tower is an icon of Paris and France. The official website of France
(www.france.fr) indicates that it has been a tourist favorite for the past 120 years, attracting 7
million tourists annually, of which 75% arrive from abroad. Whether it is the Niagara Falls in
USA or the Taj Mahal in India or the Pyramids in Egypt, many businesses and industries such as
hotels, restaurants, flourish under the umbrella of heritage tourism. In this regard, suitably
pricing hotel rooms and related services for tourists visiting heritage destinations becomes a
crucial issue.
This paper investigates the pricing strategy to be deployed at a hotel in close proximity to
a heritage site, in which the rooms are differentiated based on heritage. Consider an example.
The Marriott group runs a heritage hotel near the Eiffel Tower called the Marriott Renaissance

Arc de Triomphe Hotel. The rooms in this hotel can be readily distinguished based on the view
afforded from the balconies and windows. While some hotel rooms offer a view of the Eiffel
Tower (See Figure 1), the Eiffel Tower is not visible from the remaining rooms (See Figure 2).
In this example, the rooms offering a view of the Eiffel Tower, offer a relatively higher level of
heritage. Accordingly, pricing these two types of hotel rooms poses an interesting research
question. While it is obvious that a room with a view must be priced relatively higher, it is not
obvious how much higher should its price be? This paper investigates this issue. Pricing rooms
poses a challenge to the hotel, since several economic and psychological factors are at play while
consumers decide which hotel room to rent. First, the hotel needs to charge a suitably higher
price for its superior rooms to extract maximum value from the consumers who are willing to
pay an extra amount for the additional exposure to heritage. Second, the price difference between
the high-heritage and low-heritage rooms needs to be optimal in order to limit cannibalization.
Third, the cheaper low-heritage rooms need to be priced low enough to encourage
economy-minded consumers to also rent rooms at the hotel. Fourth, the hotel needs to recognize
that its rooms are somewhat equivalent to a perishable commodity if a given room is not rented
on a given night, the hotel makes no money from it, despite continuing to incur the fixed
maintenance costs. These factors jointly suggest that while setting prices for its rooms, a hotel
needs to strike an optimal, profit-maximizing balance between multiple economic forces and
incentives. Thus, this paper contributes to the extant literature on pricing hotel rooms (Carvell &
Herrin, 1990; Bull, 1994; Wu, 1999; Espinet et al., 2003; Poria, 2003; Lockyer, 2005; Thrane,
2005; Hung et al 2010)
In this paper, we develop an economic model of hotel room pricing. We construct a
model of a heritage hotel having two types of rooms -- those with relatively high- and low-levels
2

of heritage. The hotel needs to set prices for both types of rooms. We deploy Game Theory
methodology to solve for the profit-maximizing prices of the heritage hotel. Thus, this paper
complements the previous research efforts study hotel pricing using Game Theory (for e.g. Gu
1997; Chung 2000; Lai and Ng 2005; Collins and Parsa 2006; Schwartz 2006).
It is well known that many factors can potentially influence the eventual price of a hotel
room. Our model focuses on two important factors, assuming that all other factors remain
unchanged. The first factor is the extant of differentiation based on heritage, between the two
types of hotel rooms. The second factor is the relative supply of high-heritage rooms in the hotel,
as a percentage of the total supply of rooms in the hotel. We analyze how to maximize the joint
profit earned by a heritage hotel as a function of these two factors, holding all else constant. We
derive the equilibrium prices of both types of hotel rooms as a function of the supply of rooms
and the heritage differentiation between the rooms.
We also perform comparative statistics on the equilibrium prices, with respect to the
relative supply of rooms yielding some potentially counter-intuitive insights. We find that an
increase in the relative supply of high-heritage rooms in the hotel results in a decrease in the
price of the high-heritage rooms. This is not surprising. More interestingly, the impact on the
price of the low-heritage rooms is non-monotonic. As the supply of high-heritage rooms
increases, it results in the price of the low-heritage rooms first decreasing and subsequently
increasing, thus following a U-shaped profile. This variation in pricing is difficult to predict in
the absence of our model.
An additional benefit of deriving the profit maximizing hotel room prices is that we can
analyze the effect of pricing strategy on the hotel occupancy and profits. Here, occupancy refers
to the proportion of hotel rooms that the hotel is able to successfully rent. Conceptually speaking,
3

the occupancy is the ratio of the demand to the supply of hotel rooms. We are able to derive the
equilibrium occupancy rates of both types of high- and low-heritage rooms, as a response to the
profit-maximizing prices set by the hotel. And given the occupancy rates and the prices, we get
an analytical for the maximum profit that the hotel can earn at Nash Equilibrium.
We find that as the supply of high-heritage rooms increases, while the occupancy rate of
the high-heritage rooms increases, the occupancy rate of the low-heritage rooms decreases. The
increase in supply of the high-heritage rooms leads to a correspondingly larger demand for these
rooms, resulting in an increase in their occupancy rates. The reasoning for the reduction in the
occupancy rate of the low-heritage rooms is similar. What is interesting is the resulting impact on
the overall occupancy rate of the hotel. Our analysis counter-intuitively shows that the overall
occupancy at the hotel decreases, despite an increase in the supply of high-heritage rooms. In
other words, the heritage hotel rents relatively fewer rooms, despite an increase in the relative
proportion of high-heritage rooms. This is because the relative increase in the occupancy of highheritage rooms is less than the corresponding decrease in occupancy of the low-heritage rooms.
The effect of the supply of heritage rooms on the hotels profits is worth discussing.
Nave intuition suggests that as the relative supply of high-heritage rooms increases, the hotels
profit correspondingly increase. The primary reason is that the margins on the high-heritage
rooms are higher than the margins on the low-heritage rooms. If the hotel rents a greater
proportion of these high margin rooms, the hotels profit should obviously increase. Our analysis
is largely consistent with this thinking, with one notable exception. We find that when the supply
of high-heritage rooms is relatively small, the hotels profits can decrease despite an increase in
the supply of high-heritage rooms. This happens because at this level, the price of not only the
high-heritage rooms but also the low-heritage rooms decreases with an increase in the supply of
4

high-heritage hotel rooms. This implies that the margins made by the hotel on both types of
rooms decreases and as a result the net profit made by the hotel decreases. This is a
counterintuitive finding.
We also conduct an empirical study of hotel room pricing near the Eiffel Tower in Paris,
France. This study nicely complements our theoretical analysis. We survey the prices of two
hotels located near the Eiffel Tower, over a period of 6 months. Consistent with the theoretical
model, each hotel in our dataset has two types of rooms rooms with or without a view of the
Eiffel Tower. Consistent with our hypothesis, we find that the rooms with a heritage view are
priced significantly higher. Our regression analysis indicates that these heritage hotels charge a
rental price premium of 115 Euros for the high-heritage room, relative to the low-heritage room.
Interestingly, we also observe that the price premium at the more expensive hotels is higher than
the price premium at the relatively less expensive hotels. Thus, our regression analysis also
contributes to previous empirical research related to hotels (e.g. Baum, T., & Mudambi, 1995;
Kimes et al, 1998; Espinet et al 2003).
The rest of our paper is organized as follows. In section 2, we review the prior literature
related to our paper; in section 3, we develop a Game Theory-based model of heritage hotel
pricing, occupancy and profit; in section 4, we present an empirical study of hotel prices close to
the Eiffel Tower in Paris, France; finally in section 5 we discuss our findings and conclude this
paper.

2. Literature Review
Our paper is related to two inter-related streams of literature. We discuss each stream in turn.
Pricing in the Hotel Industry
Our paper is closely related to previous management research on the hotel industry. First
and foremost, the hotel rental decision has been found to be crucially influenced by the prices set
by hotels (Hung, Shang, & Wang, 2010; Lockyer, 2005). Yet, researchers have suggested that
price planning is a potentially overlooked and under-studied area of research (Hoffman, Turley,
& Kelley, 2002; Rowley, 1997). A variety of factors and attributes such as the hotel location, the
service quality, the reputation of the establishment, the perceived levels of cleanliness and
security and so on, have been shown to impact consumer choice (Chu & Choi, 2000). We review
recent research on this topic. Prior research has evaluated the role of a large number of hotel
characteristics that drive the room prices set by the hotels. These include the brand equity of the
hotel, the location of the hotel relative to prominent landmarks of the city, the amenities inside
the hotel rooms, the hotel size, the availability of restaurants within and close to the hotel, the
availability of parking and recreation facilities in the hotel premises, among other pertinent
factors (See Bull, 1994; Carvell & Herrin, 1990; Espinet et al., 2003; Poria, 2003; Thrane, 2005;
Wu, 1999 for representative samples of research). This research suggests that any unique feature
or combination of features that is strongly significant for at least one set of consumers can be
potentially used as a basis for segmentation, targeting and positioning segmentation (Dub &
Renaghan, 2000). Many other researchers have investigated this issue for instance, Baum and
Mudambi (1995) present an empirical analysis of oligopolistic hotel pricing. Liu et al (2013)
investigate the role of cleanliness, location, room, service, sleep quality in modifying consumers
hotel expectations. Li et al (2015) use Emerging Pattern Mining technique to identify emergent

hotel features of interest to international travelers. Arifin & Maghzi (2012) study how
personalization and a warm welcome impact consumer expectations about hotel hospitality.
Sohrabi et al (2012) analyse how factors such as comfort, security, protection, network services,
hotel staff influence consumers quality perceptions of hotels. And, Ling et al (2014) study the
optimal pricing strategy of a hotel that establishes an online distribution channel through
cooperation with an online travel agency.
Game Theory and Pricing
Our paper uses Game Theory to develop the optimal pricing strategy for a heritage hotel.
Therefore, our paper is related to prior research on pricing analyzed using Game Theory as the
primary methodology. Game Theory is "the study of mathematical models of conflict and
cooperation between intelligent rational decision-makers" (Myerson 1991, Rasmusen, 1994). It
may be used to analyze a business problem in a monopoly setting or may additionally also
consider competition. In our paper, we consider a monopolist hotel making rational, profitmaximizing pricing decisions for its hotel rooms. The key concept in Game Theory is the
interactivity of the decision-making processes among all of the players. In our problem, the
stakeholders include the heritage hotel setting prices for its two types of hotel rooms and the
consumers looking to rent a hotel room. In our model, the hotel first sets prices for both types of
rooms. Next, each consumer decides to either rent the high-heritage hotel room or the lowheritage hotel room or not rent a room at this hotel.
Pricing is a key strategic decision lever used by hotels to manage revenue and maximize
profit (Kimes & Chase, 1998). In the context of hotel pricing, Lockyer (2005) reviews how
location, facilities, cleanliness of hotels and the resultant optimal price influence the dynamics of
renting a hotel room. Our paper is related to prior research on pricing since this is the crucial

decision variable in the model developed by us. Game Theory has been previously used to
investigate a series of tourism issues that concern the inter-relationships between respective
members of the tourism industry, such as travel services, attractions and hotels (Lu & Peng,
2006). Our paper contributes to this stream of work.
We review a few more papers that have used Game Theory to study hotel pricing. Chung
(2000) analyzes hotel room rate pricing strategy to increase market share also in an oligopolistic
competition setting. Israeli (2002) investigates the influence of star rating and corporate
affiliation on hotel room prices. Collins and Parsa (2006) study the effect of pricing on the
revenue of hotels. Schwartz (2006) analyzes the relationship between hotel booking and the
corresponding revenue and proposes a plan to help increase hotel revenue. Gu (1997) also
constructs a model for pricing a hotel room in order to optimize the hotels profit. Lai and Ng
(2005) study the optimal pricing of hotel rooms, in the presence of uncertainty. Guo et al (2013)
analyze the optimal pricing strategy of hotels for cooperative third-party websites in a Game
Theory- based supply-chain framework. Guo and He (2012) investigate the optimal pricing
strategies for hotels associated with a multitude of tourism packages promoted by tour operators.
Pan (2007) illustrates the effect of market demand and the capacity of a hotel on maximizing its
profit. Van Der Rest and Harris (2008) study the effect of offering discounts by hotels facing
high costs and elastic demand. Finally, Kim et al (2001) investigate the design of reward
programs, such as the frequent-guest programs offered by hotels, and their implications for
pricing strategies, also employing Game Theory as the methodology. Our paper is similar in
spirit to these studies. Yet to the best of our knowledge, none of these papers have studied the
effect of heritage on hotel pricing, occupancy and profitability.

3. A Game Theory Based Model of a Hotel Setting Room Prices for Heritage Tourists
3.1. Model
We develop a model of a hotel (e.g. Marriott Renaissance Paris Hotel) setting prices for
its rooms. The hotel is location close to a heritage tourist attraction (e.g. Eiffel Tower, Paris).
Heritage: The hotel has two types of rooms distinguished by their exposure to heritage. For e.g.,
the Marriott Renaissance Paris Hotel has two types of rooms -- some rooms have balconies
offering a spectacular view of the Eiffel Tower, while the Eiffel Tower cannot be seen from
other rooms (See Figures 1 and 2). In this context, the room with the view of the Eiffel Tower
offers tourists a relatively higher level of exposure to local French heritage and culture. Our
theoretical model is inspired by this difference.
< Insert Figures 1 and 2 >
Let

measure high-level of heritage and

the two types of hotel rooms. We have

the parameter

measure relatively low-level of heritage in

. We normalize

and

,. Thus,

measures the differentiation between the two types of rooms in terms of

heritage. Relaxing this assumption by modeling two parameters

increases the

complexity without adding to the insights.

Pricing Hotel Rooms: Suppose that the hotel sets a rental price
and a rental price

for its high-heritage rooms

for its low-heritage rooms. These prices are the decision variables in this

model.
Supply of Hotel Rooms: Suppose the hotel has a fixed total of
rooms offer high-heritage and the remaining fraction
Thus, the supply of hotel rooms consists of

rooms and

rooms. A fraction

of the

rooms offer relatively low heritage.

rooms respectively. This
9

means that the maximum revenue per day that the hotel can earn by renting all its rooms is
.
Cost: Suppose that the hotel incurs a marginal cost

in maintaining a single room and this

maintenance cost is the same for both types of rooms. We can normalize
generalizability. Relaxing this assumption by modelling

, without loss of

also does not add new insights

and the results remains qualitatively the same. The more complicated model with

and

is available from the authors on request.

Consumer Preferences: The consumers are heterogeneous in their preference for heritage. Let
denote a given consumers marginal valuation for heritage and assume that it is uniformly
distributed on

. Here,

denotes the consumers maximum marginal valuation for

heritage. Therefore, the benefit that a given consumer gets from renting a high heritage room is
, while the benefit from renting a low heritage room is

, where

and

as described above.
Utility Functions: Consumer utility from renting a room is the difference between the benefit
from renting the room and the rental price paid to the hotel. If

and

denote consumer utility

from renting the two types of rooms, we have

Decision Making: The sequence of decision-making is as follows. In Stage 1, the hotel

simultaneously sets the rental prices of the high-heritage rooms and the low-heritage rooms. In
Stage 2, each consumer makes a purchase decision. Each consumer either rents a high-heritage
room or a low-heritage room or does not rent a room at the hotel. No consumer rents both types
10

of rooms or more than one room. This is a static game of complete information. We can solve it
by backward induction using Game Theory.
3.2. Analysis
In order to solve this Game using the backward induction method, we need to first
measure the demand for the high-heritage rooms and the low-heritage rooms. The basic idea is
that a given consumer rents a hotel room if her net utility from doing so is positive and if her
utility from renting this room is higher than her utility from renting another room.
Consumers Room Rental Decision: Consider the conditions necessary for consumers to rent
the low-heritage room. A consumer rents a low-heritage room if

and

. Let

be

the marginal valuation for heritage of consumers indifferent between renting a low-heritage room
and not renting any room. From (2), solving

gives

. Let

be the marginal

valuation for heritage of consumers indifferent between renting a low-heritage room and a highheritage room. From (1) and (2), solving

gives

. This means that

consumers with low marginal valuation for heritage ranging

do not rent either room;

while consumers with medium marginal valuation for heritage ranging

heritage room and consumers with relatively high marginal valuation

rent a lowrent a high-

heritage room. This is consistent with economic intuition.

Demand: This does imply that the demand for low-heritage rooms is
and the demand for the high-heritage rooms is

. Given these demand function,

we notice that there is incomplete market coverage, since there are some consumers with
sufficiently low valuation for heritage hotel rooms that do not rent any room.

11

Occupancy Rates: The occupancy rate is simply the ratio of demand and supply of hotel rooms.
Recall that the hotel has a supply of

high-heritage rooms and

low-heritage rooms.

The occupancy rate refers to the fraction of these rooms that are rented. The occupancy rates of
the high-heritage and low-heritage type of rooms are

and

respectively. The overall occupancy rate of the hotel is

Profit: Given the demand functions, we can write the profit function. The hotels profit is the
sum of its profit from both types of rooms, measured as

Substituting from above, we get the following profit function.

3.2.1 Pricing
The hotel sets the price of each type of room such that it maximizes its profit function in
equation (3). We solve the hotels profit maximization problem using the Backward Induction
technique from Game Theory. The equilibrium prices are summarized in Proposition 1.
Proposition 1: Hotel Pricing Strategy
The hotel sets the following prices for its rooms.
Type of Hotel Room

Price

High-Heritage Rooms

Low-Heritage Rooms

12

The equilibrium prices need to be positive,

necessary condition for positive prices is

and

. From Proposition 1, the

. This requirement is satisfied if the high-

heritage room is sufficiently differentiated from the low-heritage room.

It also follows that the relative price difference between the two types of hotel rooms is
.
3.2.2 Occupancy Rates
The price of the hotel rooms are the decision variables in the model. Given the
equilibrium prices, we can derive the resulting demand and the occupancy. At Nash equilibrium,
the occupancy rates are as stated in Proposition 2.
Proposition 2: Hotel Occupancy
Type of Hotel Room

% Occupancy

% Occupancy

High-Heritage Rooms
All
Low-Heritage Rooms

Rooms

We focus our attention on the parametric space in which the occupancy rates are positive.
From Proposition 2, we see that

if and only if

and

if and only if

Overall, the prices and occupancy rates are positive if and only if the high- and low-heritage
rooms are sufficiently differentiated. This imposes constraints on the parameters

and

in our

model, as summarized in Lemma 1.

13

Lemma 1: The relative proportion of high-heritage rooms in the hotel is bounded and the highand low-heritage rooms need to be sufficiently differentiated

Lemma 1 implies that the heritage difference

sufficiently large

between the two types of rooms needs to be

. The rest of our model analysis assumes that the boundary conditions

specified in Lemma 1 are satisfied.

3.2.3 Comparative Statics
Influence of Supply

on Pricing: We analyse how the prices of the high-and low-heritage

type rooms are influenced by an increase in the relative supply of high-heritage rooms

in the

hotel. This analysis is useful in two ways. First, it allows us to compare the relative prices of
rooms at hotels with varying proportions of high- and low-heritage rooms. Second, we can
investigate the benefit of a hotel upgrading a low-heritage room into a high-heritage room, if it is
possible. Differentiating the hotel room prices specified in Proposition 1 with respect to

and

analyzing its sign indicates the trend. This analysis is summarized in proposition 3.
Proposition 3: Effect of an increase in the supply of high-heritage rooms

on the prices of

high- and low-heritage rooms

Supply of High-

Price of high-heritage room

Price of low-heritage room

Heritage Rooms
Less

Decreases

Decreases

More

Decreases

Increases

14

Effect of Supply on the Price of High-Heritage Rooms: Proposition 3 says that if the relative
supply of high-heritage rooms ( ) increases, the equilibrium price of the high-heritage room
decreases

. This is not surprising. If the supply of high-heritage rooms is limited (i.e.

is small), the hotel can afford to raise their price and rent these rooms to the consumers having
the highest valuation for heritage. If the relative supply of these rooms increases, the hotel needs
to lower the price in order to rent the extra rooms. Hence, price

is decreasing in .

Effect of Supply on the Price of Low-Heritage Rooms: The effect of increasing

on the price

of the low-heritage rooms is more interesting since the relationship is non-monotonic. The price
is decreasing in ,
increasing in ,

when it is relatively small in the range

when it is relatively large in the range

understand this reversal, recall that as the supply of high-heritage rooms

corresponding supply of low-heritage rooms

, but
. In order to
increases, the

decreases. The intuition behind this is as

follows. There is a direct effect and an indirect effect that influences the price of low-heritage
rooms

. The indirect effect arises from the price of the high-heritage rooms. Since the hotel

decreases

in response to increasing , it makes the high-heritage rooms more attractive.

Therefore, some marginal consumers, who would otherwise have settled for a low-heritage
room, instead rent a high-heritage room. This prompts the hotel to reduce the price of the lowheritage rooms.
The direct effect is that as

increases, the relative supply of low-heritage rooms

decreases. This scarcity prompts the hotel to raise their price. And this scarcity becomes more
acute at larger levels of . Overall, at lower levels of , the indirect effect dominates the direct

15

effect, thus leading to a net decrease in price. At higher levels of , the direct effect dominates
the indirect effect, thus leading to a net increase in price.
Numerical Illustration: Proposition 3 is illustrated in Figure 3. It shows plots of

and

with

respect to , respectively, holding

constant. From Lemma 1, the feasible range is

. Thus, Figure 3 illustrates that

is strictly decreasing in . In contrast, it also illustrates that

is decreasing in

when

, but increasing in

when

. Thus, the plots in

Figure 3 are consistent with proposition 3. If we draw similar plots for different levels of H, the
trends shown in Figure 3 qualitatively remains the same.
<Insert Figure 3>
Relative Price Difference: Since the relative price difference between the hotel rooms is
, it follows that an increase in the proportion of high-heritage rooms
decreases the relative price difference between the two types of rooms.
Influence of differentiation

on Pricing: We analyze how the equilibrium prices of high-

and low-heritage rooms are influenced by an increase in the degree of differentiation between the
two types of rooms

. Such an analysis can also shed light on the hotels incentive to invest in

the extant of heritage and increase the differentiation between the rooms. Given the equilibrium
prices summarized in Proposition 1, as
increases
intuitive. As

becomes larger, the price of the high-heritage room

, while the price of the low-heritage room decreases

. This is

increases, holding all else constant, the high-heritage rooms become more

attractive to heritage tourists and in contrast the relative valuation of the low-heritage rooms
reduces. The hotel incorporates this difference in its pricing.
16

Influence of Supply

on Occupancy: We analyze how the occupancy of high- and low-

heritage rooms are influenced by an increase in the relative supply of high-heritage rooms

in

the heritage hotel. Recall that occupancy refers to the proportion of rooms the hotel is able to
rent. The trends are summarized in Proposition 4.
Proposition 4: As the supply of high-heritage rooms
rate of the high-heritage rooms increases
rooms decreases

in the hotel increases, the occupancy

, while the occupancy of the low-heritage

Overall, the occupancy rate decreases

To appreciate this, note that Proposition 2 states the occupancy as a function of

Given the expressions in Proposition 2, differentiating
gives

and .
with respect to

. The reason for this trend is that as the relative supply of high-heritage rooms

increases (i.e.

increases), the hotel reduces the price of the high heritage rooms. As a result, the

demand for these rooms increases, but it increases at a faster pace than the increase in supply.
Overall, the effect is that the occupancy rate of the high-heritage hotel rooms increases with an
increase in supply ( ).
Next, consider the variation in the occupancy rates of the low-heritage rooms in response
to an increase in supply of high-heritage rooms. From Proposition 2, we have
It follows from differentiation that
and demand with an increase in . First, as

. This is because three factors influence the supply

increases, the supply of low-heritage rooms

decreases, which increases the occupancy of the low-heritage rooms. Second, as

increases, the
17

hotel lowers the price of the high-heritage rooms making them relatively more attractive,
adversely affecting the occupancy of the low-heritage rooms. Third, as

increases, the hotel first

lowers and then raises the price of the low-heritage rooms (Proposition 3). The higher prices of
the low-heritage rooms causes a reduction in their occupancy. The net effect of these three
economic forces is that the occupancy of the low-heritage rooms decreases with an increase in
supply of high-heritage rooms

Numerical Illustration: Proposition 4 is illustrated in Figure 4. It shows plots of

respect to , respectively, holding
. Figure 4 illustrates that

and

with

constant. From Lemma 1, the feasible range is

is decreasing in , while

is increasing in . The plot also shows

that the overall occupancy is decreasing in . Overall, we note that the trends are consistent with
proposition 4.
<Insert Figure 4>
Influence of product differentiation

on Occupancy: We can also analyze how the

occupancy rates of high- and low-heritage rooms are influenced by an increase in the degree of
differentiation between the two types of rooms
Proposition 2, as

. Given the occupancy rates stated in

becomes larger, the occupancy of the high-heritage room increases

, while the occupancy of the low-heritage room decreases

. As

increases, holding

all else constant, the high-heritage rooms become more attractive to heritage tourists and in
contrast the relative preference of the low-heritage rooms reduces. Despite the hotel raising the
price of the high-heritage rooms and reducing the price of the low-heritage rooms, relatively
more consumers prefer to rent the high-heritage rooms.

18

3.2.4 Profit
Next, we measure the hotels profit at Nash equilibrium. Recall that the hotels profit function is
. Substituting the equilibrium prices (Proposition 1) and the
equilibrium occupancy (Proposition 2), gives us the hotels equilibrium profit, summarized in
Proposition 3.

Proposition 5: Hotel Profits

The hotel earns the following profit at Nash Equilibrium.

Influence of Supply

on Profits: We analyze how the hotels profit is influenced by an

increase in the relative supply of high-heritage rooms

. One might intuitively expect that the

hotels profit will strictly increase as the supply of high-heritage rooms increases, since these
rooms earn higher margins than low-heritage rooms. While is generally true, it is not always the
case. The profit is decreasing with

at low levels of

and increases thereafter

. The intuition behind the profit decreasing, despite an increase in the proportion of
high-heritage hotel rooms is as follows. When

is small, the prices of both the high- and low-

heritage rooms are decreasing in lambda (See Propositions 2 and 3). This means that the hotels
margins decline with an increase in . While the occupancy rate of the high-heritage rooms
increases, the occupancy rate of the low-heritage rooms declines with an increase in

and

19

importantly, the overall occupancy rate declines with an increase in . The net effect of these
changes is that the hotels profit declines with , when it is small.
Numerical Illustration: The profile of the profit function in Proposition 5 with respect to
lambda is numerically illustrated in Figure 5. It shows a plot of
constant. The feasible range of
range, the profit is decreasing with ,
increases with respect to ,

when

with respect to , holding

, is given by

. Over this

at low levels of ,
at higher levels

and
.

<Insert Figure 5>

4. An Empirical Field Study of Hotel Prices near Eiffel Tower, Paris, France
4.1 Overview
The objective of this study was to investigate the pricing strategy employed by hotels located at
heritage sites. This study analyzed hotel prices at Eiffel Tower, France. Our goal was to compare
prices of hotels rooms with a view of the Eiffel Tower, with the prices of rooms without a view.
The Eiffel tower is 312 meter iron lattice tower in Paris, France. It is one of the most
visited monuments in the world. It is estimated that over 200 million people have visited Eiffel
tower since its completion in 1889 (http://www.worldsiteguides.com/). The tower has become a
prominent symbol of France and reflectsthe history and culture of the country. In this study we
compared the prices of hotel rooms situated near the Eiffel Tower. We compared the prices of
hotel rooms offering a heritage view of the Eiffel Tower with the prices of otherwise
comparable hotel rooms not offering a heritage view. Taking clues from hedonic pricing theory
(Rossen 1974, Tomkovick and Dobie 1995), we believe that consumers are asked to pay a pricepremium for the pleasure of watching a heritage view from their hotel room. If there is a price of
20

heritage, we expect that the hotel rooms offering heritage views will be priced higher than
comparable hotel rooms without heritage views, after controlling for other factors. Accordingly,
we construct the following hypothesis:

H1: The average prices of hotel rooms at heritage sites with heritage views are higher
than the prices of comparable hotel rooms without heritage views.
4.2 Data
For this study, we collected data from two hotels -- Hotel Renaissance
(http://www.marriott.com/hotels/local-things-to-do/parsp-renaissance-paris-le-parc-trocaderohotel/) and Hotel Grenelles website (http://www.hotelgrenelle.com/). Both these hotels are
situated near the Eiffel Tower, Paris. These hotels have two types of rooms. Some rooms provide
breath-taking views of the scenic beauty of Eiffel Tower from the window, while other rooms do
not provide any view of the Eiffel Tower. We expected that a comparison of hotel rooms with
different views from the windows, would explain the extent to which hotels charge price
premiums for heritage views.
We focused on hotel rooms that had two queen-sized beds. This type of room was
available with two types of views from the window -- City view, and Eiffel Tower views. The
hotel also had other rooms with king-sized beds and larger suites, which we ignored in order to
limit the scope of our data collection.
Seasonality: We collected data on June 30, 2014. We recorded the price of reserving a room in
advance for future dates ranging from July 18, 2014 to Feb 28, 2015. This duration was 225 days
or 32 weeks. Hotel room prices near the Eiffel Tower are expected to vary with the season.
Therefore, analyzing prices over 32 weeks helped us characterize the price of heritage, even after
21

controlling for price variations due to seasonality and ruling out this alternate explanation for any
price dispersion.
We additionally considered a second factor. A hotel room is typically expected to be
more expensive during the weekend (e.g. Saturday) compared to the price of the same hotel
room during weekdays (e.g. Wednesday). Indeed, it is quite reasonable that hotels discriminate
between consumers based on whether they rent a room during the week or during the weekend.
In order to accurately measure the price of heritage with respect to the view of the Eiffel
Tower, it was crucial to control for price variation driven by this factor.
Thus, accounting for both the factors outlined above, we recorded hotel room prices for
rooms having the two types of views described above, for every Wednesday and Saturday,
during the July 18, 2014 to Feb 28, 2015, timeframe, thereby generating 232 data points. We
used a dummy variable

to indicate whether a posted price corresponded to a weekend

Saturday

or a weekday Wednesday

Heritage View: We used a dummy variable HeritageView to indicate whether a hotel room
offered a city view (HeritageView =0), or the room provided a view of the Eiffel Tower from the
window or balcony (HeritageView =1). In other words, we classified the views on two levels of
heritage. It was also possible that the price of heritage is higher during the weekend, compared to
a weekday. In order to research this possibility, we accounted for a possible interaction between
and

Price: We used the variable Price to indicate the price of a hotel room. The prices ranged from
$123 to $137 in Grenelle Hotel and $369 to $621 in Renaissance Hotel. We intentionally
selected an expensive hotel (Renaissance Hotel) and a moderately priced hotel (Grenelle Hotel).

22

We did this so that our results could be more generalizable across hotel types. Also, we were
interested in seeing whether the price premium for heritage at an expensive hotel is higher or
lower that the price premium for heritage at a moderately priced hotel. The summary statistics
for the hotel room prices, broken down by the type of view on offer, are available in Table 2. As
shown in Table 2, the average room prices were $129, and $492 at Grenelle Hotel and
Renaissance Hotel respectively.
<Insert Table 2>
4.3 Model
In order to test Hypothesis 1, we proposed the following model:

(3)
We established the effect of heritage view on the price of a hotel room with a simplemodel. We
regressed

on

and an interaction between

and

.
We first estimated the model, using linear least squares. This is the best known and
simplest technique. However, it also has some well-documented limitations. Next, we repeated
the estimation using a more advanced technique. We repeated the regression analysis of hotel
room prices in a mixed-model framework. Our model accounted for both fixed-effects and
random-effects, controlled for unobserved heterogeneity, and was estimated using the Restricted
Maximum Likelihood (REML) methodology.
If there was a price of heritage in the market, we expected to find the coefficient of
to be positive.

23

4.4 Results
We found empirical support for H1. The average room price of heritage view (Eiffel
Tower View) was higher than the prices of hotel room with City View. The regression analysis
using Ordinary Least Squares yielded

>0, with p<0.05 as shown in Table 3. And as expected,

the average price of hotel room on weekend was also higher than the price of hotel room on
weekdays

>0, with p<0.05. Moreover, the regression analysis done in a Mixed-Model setting

yielded the same qualitative answer. Regression results using both methods are summarized in
Table 3. The key outcome of the analysis was empirical evidence in favor of a price of heritage
as described in Hypothesis 1.
<Insert Table 3>
5. Discussion and Conclusion
The central research objective of this paper was to investigate the effect of heritage on
hotel room pricing and the resulting occupancy and profitability of the hotel. We adopted a mix
of theoretical and empirical methodology for this purpose. We constructed a parsimonious
theoretical model of a heritage hotel setting prices to maximize the hotels profit. We analyzed
the problem of a hotel setting optimal prices for two types of rooms rooms having relatively
high levels of heritage and rooms having comparatively low levels of heritage. Although a hotel
typically has more than two types of rooms, a theoretical model of a hotel with two types of
rooms allowed us to fully solve the model and charaterize the optimal pricing strategy in closedform.
We derived the profit-maximizing prices, as a function of two crucial heritage-related parameters
the relative supply of high-heritage hotel rooms and the relative differentiation between the two
types of hotel rooms. In practise, many more than these two factors are likely to influence the
24

pricing of hotel rooms. Incorporating all factors would make a model very difficult to solve. Our
objective was to focus on the influence of two factors supply and product differentiation on
hotel room pricing, implicitly holding all constant.
We found that the prices of the high- and low-heritage hotel rooms vary non-linearly and
non-monotonically with the relatively supply of high- and low-heritage rooms and the extant of
product differentiation between the two types of rooms. First, we found that the price of the highheritage rooms decreases as their supply increase. Second, and in contrast to this, we found that
the price of the low-heritage room follows a U-shaped pattern as the relative supply of highheritage rooms increases. This price is decreasing when the relative supply of high-heritage
rooms is in small range, but increasing when the relative supply of high-heritage rooms is in
large range. The contrasting difference in how the profile of prices of the two types of rooms
varies is a research contribution of the paper.
Given the hotels optimal profit-maximizing pricing strategy, we characterized the
resulting hotel room occupancy rate and total profits. The occupancy rate of a hotel room type is
the ratio of the demand and the supply of the room-type. We can think of it as the relative
proportion of the supply of hotel rooms that gets rented by heritage tourists. We found that the
influence of an increase in the relative supply of high-heritage rooms on the resulting occupancy
of the two types of rooms was opposite. While the occupancy rate of the high-heritage rooms
increased, the occupancy rate of the low-heritage rooms decreased. This disparity was stricking.
The net effect on the occupancy rate of the entire hotel was also insightful. We found that the net
occupancy rate decreased, as the relative supply of high-heritage rooms increased.
The theoretical model also predicted how the hotels overall profit varied with the
proportion of high- and low-heritage rooms. While lay intuiton would suggest that the hotels

25

profit should strictly increase as the relative supply of high-heritage rooms increased, we found
that this was not always the case. Instead, when the supply of high-heritage rooms was small, we
observed that the hotel profits could decrease, despite an increase in the relative supply of highheritage rooms.

In conclusion, this paper contributes by analyzing the influence of heritage on hotel pricing. And
it also establishes the coresponding effect of heritage on the occupancy rates and profit of the
hotel.

26

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29

Table 1: Model Variables in the Eiffel Tower Study

Hotel

Refers to whether it is Renaissance hotel or Grenelle Paris Tour Eiffel

hotel.

Weekend

Whether the price of rooms is checked during weekend or week days

EiffelTowerView Whether the view is that of Eiffel Tower or any ordinary view
Price

Price refers to the price of the hotel room whether it is a room in

Renaissance hotel or Grenelle Paris Tour Eiffel hotel.

Table 2: Summary Statistics in the Eiffel Tower Study

Hotel Name
Renaissance Hotel
(Hotel=0)

Grenelle Hotel
(Hotel=1)

Room View

A view of the Eiffel Tower

50
(EiffelTowerView=1)
A neutral view of the garden/city 52
(EiffelTowerView=0)
All rooms
102
A view of the Eiffel Tower
62
(EiffelTowerView=1)
A neutral view of the garden/city 68
(EiffelTowerView=0)
All rooms
130

Price (Euros)
Mean (SD)
621.53 (90.99)
369.23 (89.49)
492.90 (155.32)
137.28 (44.53)
123.27 (36.56)
129.95 (41.00)

Table 3: Regression Analysis of Eiffel Tower views from hotel rooms in Paris
Price of Heritage with interaction between
Weekend and Eiffel Tower View
OLS Model
Mixed model

SE

SE
Intercept
448.133
13.304***
267.512
180.867
Hotel
-361.19
11.79***
Weekend
-27.211
16.27 ( .)
-27.211
16.27 (.)
EiffelTowerView
114.687
16.485***
114.695
16.485 ***
Weekend*EiffelTowerView
8.046
23.42
8.038
23.42
AIC
2748.655
2729.522
BIC
2769.335
2750.203
30

Figure 1: Marriott Renaissance Arc de Triomphe Hotel room with a view of the Eiffel Tower

Figure 2: Marriott Renaissance Arc de Triomphe Hotel room with a view of the garden

31

Figure 3: Hotel Prices as a function of heritage

Prices of High-Heritage rooms (H=2)

1.6
1.5
1.4
Prices

1.3
1.2
1.1
1
0.9
20%

25%
30%
35%
40%
45%
% High Heritage Rooms in Hotel (l)

50%

Price of Low-Heritage rooms (H=2)

0.6
0.55

Prices

0.5
0.45
0.4
0.35
20%

30%
40%
% High Heritage Rooms in Hotel (l)

50%

32

Figure 4: Hotel Occupancy as a function of heritage

Figure 5: Hotel Profit as a function of heritage

Hotel Profit (H = 2)
0.2

Profit

0.196
0.192
0.188

0.184
0.18
25%

26%

27%

28%

29%

30%

% High Heritage Rooms in Hotel (l)

33