Branding, Cannibalization, and Spatial Preemption: An Application to the Hotel Industry

Abstract

In many settings where spatial preemption might be expected to produce tightly concentrated industry structures, firms share the market instead. Using a strategic investment model, I show that this can be rationalized by heterogeneous brand preferences, which cause new product introductions by incumbent firms to disproportionately cannibalize sales from existing affiliated products. I then present an empirical example using data on the branded segment of the lodging industry, which has many characteristics associated with spatial preemption, but is also characterized by strong brand-preferences. Consistent with the theoretical model, I find large within-firm revenue cannibalization effects from new hotel openings. These effects are attenuated -- but not removed -- by brand-proliferation strategies. Moreover, I find evidence that the industry practice of franchising through non-exclusive contracts softens inter-firm competition. Analyses of growing hotel markets support the conclusion that intra-firm cannibalization inhibits spatial preemption. Growth is far more likely to occur as a result of entry than expansion.