Elsevier

Information & Management

Volume 54, Issue 6, September 2017, Pages 745-756
Information & Management

How small hotels can drive value their way in infomediation. The case of ‘Italian hotels vs. OTAs and TripAdvisor’

https://doi.org/10.1016/j.im.2016.12.002Get rights and content

Highlights

  • Hotels on multiple OTAs are beneficial in terms of revenue growth.

  • Hotels on multiple OTAs are beneficial in terms of operating profitability.

  • Hotels on multiple OTAs have better profitability than being on TripAdvisor.

  • Hoteliers should know where to put resources for capturing value.

  • Results help to study industry architecture changes for experience goods.

Abstract

Infomediaries such as online travel agencies (OTAs) and review aggregator websites are profoundly changing the structure of the hospitality industry with consequences in the mechanisms of creation and capture of economic value for hotels. By drawing on arguments from resource-based views, transaction cost economics and industrial organisations, we look inside these mechanisms by assessing whether in regard to creation and capture of economic value hotels should pay more attention to diversify the number of OTAs that distribute their services or to improve their reputation through travellers’ reviews posted on TripAdvisor. Gathering data on 62,865 travellers’ reviews on TripAdvisor and on the presence of hotels on multiple OTAs, we built a panel dataset of 355 hotels spanning from 2004 to 2014 and also including hotels’ financial data. Fixed effects regression models show that hotels listed on multiple OTA bolster sales revenue and operating profitability. We demonstrated that for hotels, the online visibility on OTAs counts more on value capture than the online reputation gained on TripAdvisor. Through the presence on multiple OTAs, hotels are expected to have a higher bargaining power towards each individual distributor. We discuss the implications of these results on the way hotels, OTAs and TripAdvisor can generate and capture value in the vertical chain of the travel industry.

Introduction

In the last decade, Internet-related technologies have enabled radical transformations in the structures of many industries [1], causing the rise of new rules and roles (i.e. industry architectures) that circumscribe the division of labour and the distribution of profits along a value chain [2]. In this scenario, the hospitality industry is one of the settings where changes enabled by the Internet are more visible [3]. New mechanisms of intermediation over the Internet are marginalising the role of traditional ‘bricks-and-mortar’ travel agencies and the crowd-sourcing logic through which travellers’ experiences are created and shared through online reviews and recommendation algorithms [4] and have led to declining sales for publishers of touristic guides such as Lonely Planet [5]. Furthermore, compared with other industries, the hospitality sector has traditionally been a forerunner in experiencing the transition from the physical to the Internet channel for managing customer relationships. Phenomena such as dynamic pricing, infomediation [6], online reservations and recommendation systems have first taken place in this industry and then have been diffused in other sectors of retail and services, enabling changes in business models, competitive strategies and customers’ behaviours. Therefore, studying how the Internet changes value creation mechanisms in the hotel industry can generate relevant and generalisable implications even for other industries.

Two typologies of actors have emerged in the infomediation between the end customers and hotels, and they both create economic value by managing information about travellers and hotels (henceforth they are indicated as infomediaries): review aggregators of travel-related contents such as TripAdvisor and Trivago and online travel agencies (OTAs) such as Booking.com and Expedia. OTAs have replaced traditional travel agencies offering customers a broad scope of booking services related to their travels (e.g. hotels, car rental, flights). Today OTAs manage the majority of hotel reservations that are made online [7]. Online travel-related content websites allow travellers to share their experiences and express their recommendations about hotels, destinations and point of interests, and they play a crucial role in forming hotels’ online reputation by leveraging the electronic word of mouth of the ‘crowd’ of travellers. In the case of TripAdvisor, the crowd is constituted by more than 44 million members who have posted more than 100 million reviews. In addition, online travel-related content websites have been able to move further out the frontier among two conflicting dimensions of information like reach and richness [8]. A broader reach of customers can now access at a lower search cost richer information that is customised to their preferences and interests about destinations and hotels.

The two stages of infomediation have a high market concentration because of entry barriers such as network externalities and the high degree of capital intensity and scale economies existing in data management [9]. Referring to recent approaches in industrial organisation that look at the ‘industry architecture’ concept [10], OTAs and users’ review aggregators increasingly play a crucial role in creating economic value in the hospitality industry and in shaping the rules of competition. Specifically, infomediaries assume the role of the least replaceable players and of the ‘guardian of quality’ in the value chain, and they bring more competition for hotels because of the reduction in the search costs for the end customers. Infomediaries thus create value by certifying quality [11] and by favouring lower prices and larger sales volume.

In this scenario, managing online visibility on the new infomediation platforms to attract and retain more travellers is a critical factor for hotels’ profitability. OTAs and review aggregators reduce travellers’ search costs by ranking hotels by price or quality and by bringing more competition among hotels. In this way, they are becoming critical players and online visibility on these platforms is becoming a competitive necessity for hotels. This equates to a redistribution of economic power towards both digital platforms and travellers. The former can capture up to 25% of the price of a room in the form of an intermediation fee charged by OTAs and shared with review websites that convey Internet traffic to them. For customers, the value captured is in lower prices and richer information to guide their decisions about where to go.

From an economic standpoint, hotels face the challenge of capturing the economic value created by the new intermediation mechanisms over the Internet [12]. This challenge consists in balancing a tension between preserving their unit profit margin and pursuing sales growth through a higher and better online visibility. On the one hand, by being visible on the new intermediation platforms, smaller hotels can increase their revenue and their occupancy rates by accessing complementary assets in customer relationship management that can hardly develop on their own given their small size, their weak brand and the limited competencies in web marketing. On the other hand, the increased revenues coming from a better online visibility on infomediation platforms may not necessarily turn out into a greater net profitability for hotels as shown by recent studies [13], given their reduced market power and their reduction in unit profit margin rate due to the commissions paid to OTAs. For small hotels, the intricacies of this challenge lie in the complexity of improving their visibility on the Internet and leveraging it to attract more profitable customers. This activity requires a radical change in marketing competencies because of the ecosystem of visibility on the Internet requires handling new activities (such as search engine optimisation) and new business metrics and is made by a complex array of actors such as search engines, infomediaries, social media, consumer communities and web marketing agencies [14]. Internet presence through a corporate web site and search engines is not sufficient for being visible and attracting profitable customers. Specifically, hotels may use new mechanisms to communicate the value of their product, which in the case of small firms is often based on idiosyncratic features for which the superior quality may not be easily appreciated and assessed online.

The primary aim of this paper is to understand how smaller hotels should manage their online visibility to avoid situations in which the economic value generated is primarily captured by infomediation platforms and does not bolster their net profitability. Although many recent studies have shed light on the mechanisms through which user-generated recommendations generate consumers’ trust and drive sales [15], there is still lack of theoretical and empirical understanding of the conditions under which hotels can capture more economic value through the new mechanisms of intermediation, considering the fact that intermediation occurs in the two separate stages of the value chain described above. First, there is the stage where travellers check quality and the features offered by a hotel, which is primarily controlled by platforms that manage user-generated recommendation systems, such as TripAdvisor. This is the stage where a hotel’s reputation about quality and customer services is formed. Second, there is the stage where customers make an online reservation for a hotel, which is controlled by OTAs. From a managerial perspective, our focus on these two stages sheds light on which online activities hotel’s managers should invest more: either on building commercial relationships with a broad range of OTAs to increase their bargaining power towards this layer of distributors and sell more capacity online or on trying to improve their online reputation and customers’ willingness to pay through better and more customer reviews. This becomes relevant and less straightforward from a theoretical standpoint given the rapid evolution of the Internet ecosystem. In this regard, a crucial point is the mounting concerns about the authenticity of some reviews available on TripAdvisor [16] and the opacity of the popularity algorithms through which hotels are made visible on this platform [17].

We address this problem by reconciling different theoretical views on value creation and capture. First, the concept of ‘industry architecture’ in industrial organisation [10] is used to understand the mechanisms and the economic forces [12] used by infomediation platforms for capturing economic value. Second, we draw on transaction cost economics [18] to identify the conditions in which hotels can increase their bargaining power with infomediation platforms and reduce their specific investments on a certain platform. Third, we use resource-based arguments [19] to understand the dimensions in a hotel’s online visibility on infomediation platforms that are more rare, valuable and costly to imitate, and we sketch out how these dimensions of transparency affect competition dynamics. In this regard, a novelty aspect brought by our study is our focus on hotel’s profitability as dependent variable through which we observe value capture. Past studies have investigated the effect of online reviews on consumers’ purchasing choices, on their willingness to pay or on sales, leaving unexplored the issue of firms’ ability to capture value from consumer reviews in terms of increased profit. The issue whether online visibility is beneficial for hotels’ profitability assumes importance because of the commission fees they pay to infomediaries and because managing online visibility may require new resources and competencies that can entail additional fixed costs for hotels. In a nutshell, we want to weigh the benefits and the costs of online visibility by understanding whether the increase in revenue it may generate outweighs the growth in unit variable costs and fixed expenses. Drawing on these theoretical arguments and these empirical data, we demonstrate that a hotel’s presence on a multiplicity of OTAs has a positive and more salient effect on value capture than the dimensions of their visibility on consumer review websites.

We chose the setting of Italian hotels for investigating this topic because it offers some unique points of interest. Italy is the fifth largest destination for international tourism [16], because of its competitive advantage in cultural heritage, landscape beauty and food. These elements allow Italy to attract each year around 50 millions of tourists, mainly from abroad [20], although the structure of its local tourism industry is dominated by small hotels and bed and breakfast structures (B&Bs). On one hand, small hotels’ and B&Bs’ value proposition is more focused compared with large international chains on giving a ‘true Italian touch’ to customers, but on the other hand, they might have a weaker ability to capture the economic value that stems from online visibility despite their more critical need for these services because of the absence of a strong brand. Given the prominence of tourism for the Italian economy (it counts for about 8.6% of the national GDP), the hotels’ limited ability to capture the economic value brought by information is relevant at the country level as it may be reflected in a reduction of the hospitality industry’s capacity to contribute to the national wealth. The relevance of this issue in Italy is well reflected in the ‘battle’ between Federalberghi, the national trade associations of hoteliers and restaurants, and OTAs and TripAdvisor in front of the national competition authority. In this regard, in 2015, the Italian competition authority has identified a restriction of competition in the clauses enforced by Booking.com and Expedia in their contracts with hotels that impede hotels to offer their services through online travel agencies or any other booking channel (including their own websites) at lower prices or better conditions than those offered on the two infomediation platforms. In the same year, competition authorities in France and Sweden have conducted similar probes towards OTAs. In 2014, the Italian authority has also fined TripAdvisor for failing to do enough to prevent misleading and false reviews [16]. In 2015, the Rome administrative court has cancelled the fine, overturning the ruling of competition authority [21].

To investigate the value creation and value capture mechanisms from a hotel point of view, we developed a dataset on a panel of 355 hotels, observing hotels’ online visibility on TripAdvisor and on the main 13 OTAs entered in the Italian market in over a period of 10 years. This dataset puts together detailed information about the characteristics of hotels’ customer online reviews, hotels’ reply to online customer review, hotels’ listings on the main OTAs, and data on revenue and operating profit performance ranging from 2004 to 2014.

The rest of the paper is structured as follows. The first section presents the theoretical background for understanding how infomediation platforms and hotels share the economic value. We then propose and test the hypotheses on how hotels might use infomediation platforms to capture economic value. Based on these findings, we conclude by linking back to the literature, outlining limitations, identifying avenues for future research and discussing the implications for theory and practices, and their generalisability to other sectors that are shaped by infomediation mechanisms similar to the ones of the hospitality industry.

Section snippets

Sources of value creation in infomediation

In the infomediation stage of the tourism industry economic, value is created in two stages. In the first stage, value is cocreated by travellers (i.e. the crowd) when they provide ratings, reviews and other contents (such as pictures) on review aggregator websites such as TripAdvisor and Trivago. Aggregators’ contribution to such cocreation of value is based on integrating travellers’ reviews and ratings and drawing on these data providing ranking of visibility for hotels, restaurants and

Multiplicity of OTAs and value creation

Being on multiple OTAs can have several positive effects on the way hotels manage their online visibility and their sales. First, by increasing their presence and visibility on OTAs hotels can increase customers’ awareness on their products [7]. OTAs are channels used for promoting hotels’ facilities and for maintaining continuous relationships with travellers. Therefore, the larger the number of OTAs chosen by hotels, the larger is the number of promotional channels available for their online

Sample and data collection

Our data collection involved a random sample of 355 Italian hotels, extracted from a population of 2862 small and medium Italian hotels. Hotels not listed on TripAdvisor were excluded from the sample frame. Similarly, we did not consider hotels that had more than 250 employees, given our intention to focus the analysis on small- and medium-sized firms (in accordance with the European Union’s definition) that are expected to have weak brands, limited direct online sales and greater need of the

Descriptive statistics

Descriptive statistics (Table 1) show some interesting facts about how online visibility works for hotels. First, the number of OTAs is positively and significantly correlated with review valence, review volume and hotel responses. This somehow corroborates the idea that review aggregators and OTAs are intertwined stages of the infomediation value chain and that hotels tend to exploit a greater and better visibility on TripAdvisor through the presence on multiple OTAs. Second, review volume and

Discussion and conclusions

In this article, we explored how hotels can drive value their way when they manage their visibility on infomediation platforms. This topic assumes relevance in response of the shift in market power and economic control from hotels towards travellers and infomediation platforms. For exploring these trends, we drew on transaction cost economics, resource-based view, the concept of changes in industry architecture, and data that correlate actual profit and revenue performance of hotels and their

Acknowledgements

The authors acknowledge the support of the European Community through a Marie Curie Intra-European Fellowship, which provided funds to one author of the paper.

Elisabetta Raguseo is research fellow at Politecnico di Torino (Italy). Her research interests include the strategic value of Information Technology (IT), with a focus on data management in business, smart tourism, smart work and big data.

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    Elisabetta Raguseo is research fellow at Politecnico di Torino (Italy). Her research interests include the strategic value of Information Technology (IT), with a focus on data management in business, smart tourism, smart work and big data.

    Paolo Neirotti is an associate professor at the Politecnico di Torino (Italy), where he teaches Strategic Management. His research interests include the field of the strategic value of Information Technology (IT) and the transformations IT produces on industry structure and business models.

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