How digital platforms are disrupting the hospitality industry

The entry of peer-to-peer platforms like Uber, Airbnb and TaskRabbit has shaken up several industries. Often described as disruptive, these platforms manage to operate successfully without owning any of the assets that were previously considered necessary to operate, compete and succeed in a given industry. Instead, they focus on matching buyers with mostly non-professional individuals that own the required assets and are willing to share them.

 These peer-to-peer platforms often operate at the lower end of the market, where the mass of consumers is located. Therefore, they are generally perceived as a threat mostly for competitors in that market segment. For instance, Airbnb has often been described as a new competitor that takes away business from hotels at the lower end of the market, whereas more sophisticated hotels that offer better service should be less affected.

But, should we consider these new platforms as simply additional competitors to the same competitive space? Or should we consider them as "game changers" of the competitive logics in a given sector? The latter would suggest that these players, by changing the rules of competition and key success factors of the sector, would be a threat also to any incumbent.

In a study coauthored with Tim Meyer, recently recognized for the best paper prize at the Strategic Management Society, we address these questions by collecting data on the digital transformation in the hospitality industry and assessing the impact of digital platforms such as Airbnb and Booking on incumbents.

We argue, and empirically show, that the effect of digital, peer-to-peer platforms is much broader than has often been assumed. Peer-to-peer platforms do not simply affect firms that operate in the lower market segment, but they change the competitive dynamics of the industry that they enter completely. By facilitating the entry of a large number of mostly non-professional sellers, they significantly increase the supply of physical assets in an industry, and by doing so, they create room for greater market segmentation. Peer-to-peer platforms change consumer habits. Customers that are looking online for offerings on peer-to-peer platforms, are likely to look for offers provided online by more traditional incumbents as well. While these two types of offerings might be very different in the type of resources that they are based on (i.e. hotel room vs. private apartment), they are often seen as potential alternatives from the consumer perspective because they address the same need (i.e. accommodation). Ultimately, this means that very different types of players, namely peerto-peer platforms and more traditional incumbents, will compete online for the same customers.

 As this shift towards digital platforms proceeds, incumbents that used to shelter from competition by owning their own exclusive sales channels in the past, will increasingly lose their competitive advantage. Digital platforms will increasingly act as  substitutes for their own sales channels and, at the same time, they will now face more intense head-to-head price competition from other incumbents on the same digital platform. Our findings show that increasing supply on Airbnb  has a significant negative effect on the financial performance of hotels. On average, a 10% increase in the number of rooms listed on Airbnb  leads to a reduction in annual revenue of 9,662 $. However, this decrease in revenues is not distributed equally among different types of hotels. While independent hotels only suffer a loss in revenue of 1,620 $ on average, the loss in revenue of chain affiliated hotels is 13,500 $ and therefore much higher. This is consistent with our idea that the incumbents who will be affected the most by the entry of peer-to-peer platforms are the ones whose own downstream assets (i.e., sales channels) become increasingly obsolete.  

Taken together our research shows that digital platforms like Airbnb are not simply a threat for firms at the lower end of the market but they shift completely the competitive logic for incumbent firms by changing the entire competitive landscape of the industry that they enter.

Here’s a business report version summarising the results from the academic paper. Keen to learn your views/perspectives/comments on this and related issues.

#