How do hotels expand into new markets? The relationship between hotel agglomeration and entry mode

Abstract

When a hotel decides to open in a new location, it must select a specific entry mode that determines its degree of control and ownership. This study combines agglomeration theory with information economics to explain how hotel agglomerations influence the entry modes of new hotels. In particular, we argue that when facing different levels of information asymmetry derived from hotel agglomerations, new hotels should reduce the risk of adverse selection in choosing their entry modes. Using a sample of new hotels in China, this study shows that in areas of co-located higher-quality hotels, new hotels choose shared-control modes (franchise or management contracts) over full-control modes. Evidence from a sample of foreign hotels also indicates that in areas of co-located same-country-of-origin hotels, new hotels are encouraged to choose shared-control modes (franchise or management contracts) over full-control modes.