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Hotel pricing wars

Big booking sites such as Priceline or Hotwire offer consumers considerable savings, if they book rooms ‘blind,’ before knowing exactly where they will be staying. The sites disclose hotel amenities, general location and star rating, but not the hotel’s actual name until after the transaction is completed.

“This new pricing strategy allows hotel chains to hide the fact that they’re offering steep discounts,” explains Sauder Assistant Professor Mariano Tappata.  “It also helps lesser-known hotels attract customers away from big brand names by offering cut-rate prices.”

Sauder Prof. Mariano Tappata. Photo by Mark Mushet Photograph

This is called opaque selling and it’s totally transforming the way firms in the hotel industry compete, says Tappata, who teaches business strategy to BComs and MBAs.

This innovation and how it affects pricing have become a focus of Tappata’s current research. It also inspired him to create a simulation called  The Hotel Game  that allows students to compete head-to-head in real-time as hotel management teams in an online marketplace.

Sauder Professor Mariano Tappata’s market simulation game puts Monopoly to shame

The game, built around complex mathematical equations developed by Tappata, allows instructors to choose settings that govern the field of play – the available rooms, brand loyalty, demand, operational costs and more.

Armed with this information, teams compete to set prices that earn maximum profits, trying to anticipate the strategies of their competitors and leveraging opaque pricing techniques.

They engage in a series of rounds and each time, they are given the opportunity to retool their strategy, analysing what worked and how their opponents might respond. When the dust clears and the numbers are crunched, the game produces a full dashboard of charts and graphs, breaking down who came out on top and why. Ultimately the team sitting on the biggest pile of virtual cash wins.

Some students use data, others are more intuitive

“Some students open Excel spreadsheets and start playing with the data, trying to anticipate what their competitors are going to do. Others are more intuitive,” says Tappata about the methods students employ to try to get an advantage.

“But the game isn’t easy, even if you try to solve it using formal models,” he says. “The intention of the simulation is to say ‘look, real situations are not as black and white as we economists make them out to be.’ Once you’re out there in the real world, you need to take into account all the potential forces.”

He says sometimes you have to go with your gut, but intuition has to be well educated.

And education is the key to the simulation. Tappata tweaks the game parameters depending on what aspect of pricing strategy he is teaching. After the simulation, he says the students are primed to analyse the outcomes of the game and view it through the lens of academic theory.

“After the game, I also talk about the hotel industry as a particular case, and how market structure is important in determining profits. It’s an ideal starting point for teaching managerial economics or strategy, or even marketing when it comes to pricing decisions,” he says.

Tappata co-developed the game with fellow Sauder lecturer Florencia Jaureguiberry (who happens to be his wife). He also received substantial technical support from Sauder’s Learning Services Department and grants from UBC’s Teaching and Learning Enhancement Fund.

He is making his game freely available to professors around the world, and to ease game implementation, he is currently developing a series of templates to address specific pricing strategy issues.

Beyond the classroom, he says there are obvious applications for in-house education in industries where pricing can fluctuate quickly.

“More and more firms are using simulations to educate their employees. You don’t want to educate your employees while playing with real money. If you make mistakes you pay for it. With a simulation you can educate without any negative impact on the firm.”

Article originally published in UBC Reports. Words by Andrew Riley.

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