Sharing economy and incumbents' pricing strategy: The impact of Airbnb on the hospitality industry

Abstract

In this paper, we examine how the emergence of sharing economy platforms influences incumbents' price responses. Grounding on the literature on price reactions to new entrants and on the unique characteristics of the sharing economy, we argue that the effect of the penetration of the sharing economy on incumbents' prices is not straightforward, and actually depends on the type of incumbents as well as certain product/service offer characteristics. Indeed, relying on a large sample of hotel price offerings from the Italian market, we find that the effect of the growing relevance of the sharing economy (exemplified by Airbnb) on incumbents' prices depends on the type of incumbents (low/medium-end versus high-end hotels) as well as on the accommodation period (weekend versus weekdays), and thus on the type of consumers looking for accommodation. Specifically, low/medium-end incumbents set lower prices in geographical areas where sharing economy has a higher penetration, but this occurs only for weekend accommodation search. In contrast, high-end incumbents tend to set higher prices in geographical areas where sharing economy has a higher penetration, irrespective of the accommodation period. We discuss the important implications of our findings for incumbents, sharing economy platforms, consumers, and policy makers.