Room Rates as Signals of Quality, Sell-Out Risk and the Prospects of Getting a Better Deal: Analytical Model and Empirical Evidence

Abstract

Travellers make advanced booking decisions in an imperfect information environment, an environment in which price signalling is likely to occur. This study examines the unique informational role of room rates by suggesting an analytical model of room rates as a signal of quality and sell-out risk and by testing the theory empirically. The findings indicate that, even in advanced booking situations in which consumers might associate price deviations with the hotel's revenue management policies, prices can still signal quality to the consumers. Moreover, the study demonstrates that in a deal seeking/advanced booking context, there are two additional opposing impacts of the informational role of prices. Customers' propensity to book increases with higher rates because the perception of the sell-out risk is higher. However, at the same time, customers' propensity to book decreases because the higher room rate induces a higher expectation of the offer of a better deal.