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MBA: Business Economics 2018/2019 Tassamon Vessuwat ID 4339633
Abstract
In this report, we will investigate the implication behind JW Marriot Bangkok refurbishment plan through game theory approach. By this, we will separate the study into two parts. One is the reasons why they decide to renovate their building. Another part will additionally consider a suitable price point to reach the maximum revenue. Under duopoly assumption, we realized that refurbishment will be the best option for a company to secure and raise their revenue. Meantime, collusion with a hotel nearby will allow the company to set greater price point than usual and thereby support company to expand their income.
Introduction
JW Marriott Bangkok initially opened in the central business area in Ploenjit Bangkok since 1997 by Erawan group public company Limited. With good location and convenient accessibility, this 5-star hotel offers a wide range of services including convention hall, health club, spa, relaxing massage along with prestige buffet restaurants. About 20 years of JW Marriott Bangkok operation, Erawan group ultimately decided to renovate 250 rooms, all-day dining restaurants along with convention hall between 2017 and 2019, according to shareholder's meeting in 2017.
The study will divide into two parts. One will figure out a rationale behind refurbishment announcement. Another part will additionally investigate a possible price point that the company should put up to generate the highest growth of revenue. These two cases will be verified through the game theory approach which is a methodology to understand the situation in which two firms are interdependent, with respect to Krungman and Wells (2008).
Thus, we assume market only consisted of two hotels in Ploenjit Bangkok, JW Marriott Bangkok, and their key competitors. Moreover, we presume that those two players will act rationally and intelligently in which they will choose the best choices to enforce their profit. Apart from that, all players aware of the outcomes of other player and realize the game rules.
Part1: Decision on a hotel refurbishment
As mentioned, the first part of report evaluates the implication and reasons behind firm decision making on refurbishment through game theory concept. In this case, we assume that the market is a duopoly between JW Marriott Bangkok and their direct competitor, named The Landmark Bangkok.
Likewise, The Landmark Bangkok situated in the same areas as JW Marriott Bangkok as shown in figure1, and similarly operated more than 20 years by Sihanatkathakul family. Therefore, The Landmark Bangkok unavoidably is considered to be core competitor of JW Marriott Bangkok in that areas. Apart from location and years of operation, they also equipped with a variety of services such as conference rooms along with exceptional dining cuisines. Crucially, they were also in a consideration whether they should renovate their property.
To be able to understand the circumstance via game theory approach, we do not take a differentiation in term of room size, services, facilities, brand reputation and price and cost of construction into account. Moreover, we will neglect all the external factors along with constraint the demand in that areas. Importantly, all players will act logically and intelligently. In addition, we presume ceteris paribus.
Figure1: Location of JW Marriott Bangkok and The Landmark Bangkok
in Ploenjit area, Bangkok Thailand
Source: Google Map
According to Erawan group's announcement, the company aimed to receive about 20% growth of total revenue after completion of the refurbishment. Under this condition, we further presume that if one of them do renovation, they will grow at 20% and another will lose their revenue at 20%, given demand constraint. However, if both of them determine to refurbish, they will equally share growth at 10%. In this case, the payoff matrix can be illustrated as below. Regardless of figure 2, vertical aspect with grey area represented expected return that JW Marriott Bangkok received in each action, whereas Horizontal aspect with the blue area will present The Landmark Bangkok revenue increase.
Figure2: A Payoff Metrix between JW Marriott Bangkok and The Landmark Bangkok in case of Hotel refurbishment
There are four outcomes that could happen.
Case1: if both hotels choose to renovate their property, they will evenly grant greater 10% of their revenue
Case2: if JW Marriott Bangkok solely plans to refurbishment, they will enjoy rising their revenue at 20%. Whereas, The Landmark Bangkok will desperately manage their loss at 20%.
Case3: if JW Marriott Bangkok did not go to refurbishment, but The Landmark Bangkok decide to redecorate, JW Marriott Bangkok will decrease 20%, unlike 20% increase of The Landmark Bangkok's revenue.
Case4: if both players decide not to refurbish, their revenue will be the same.
Considering all aspects, when JW Marriot decided not to refurbish their hotel, The Landmark Bangkok will response by renovating their business in order to gain 20% higher, instead of steady their portfolio. In another way around, when JW Marriott Bangkok chose to refurbish, The Landmark Bangkok will decide to renovate their property in order to escape from losing their revenue at 20%. Under this circumstance, whatever JW Marriott Bangkok selected their action, The Landmark Bangkok will absolutely prefer for refurbishment. This is called a dominant strategy of The Landmark Bangkok regardless of action taken by JW Marriott Bangkok. At the end of the day, JW Marriott Bangkok, therefore, had no choices, but have to come to refurbishment to secure and gain more revenue at 10%. As a result, both companies will prefer to refurbish. This action will act as a Nash equilibrium under this situation.
Part2: Decision on setting price to maximize revenue
After all firms can make a decision on the renovation project, another step would be what new price of the room per night should be.
First of all, we referred to the previous payoff of part 1, shown as a growth of their revenue. Both companies expected to gain about 10% which can be as an implication to increase their room price at the same rate. For example, Premium Club room of The Landmark Bangkok normally offered 145 GBP per night. In this case, it will push up to around 160 GBP per night. Similarly, Double Twin Room from JW Marriot will adjust their rate from 142 GBP to about 156 GBP per night as well. In other words, firms will strategically accelerate their room rate, corresponding their estimated growth. However, it does not mean this is the best method they can get higher profit. Indeed, an alternative option would be collusion. As a result, we further utilized game theory to facilitate their decision.
Given each JW Marriott Bangkok and The Landmark Bangkok have 250 same type of new rooms and ceteris paribus. Table 1 below presented demand responding of each new price range along with total revenue of business in that areas. Unlike perfect competitive market, duopoly realized that setting higher price did not mean they will get a maximize revenue. In fact, it is possible that both JW Marriott Bangkok and The Landmark Bangkok will cooperate to act as a monopolist in that district, and together reach the highest revenue that they are able to grant.
Supposedly, two hotels agree to collude. According to Table 1, they will set up the price at 300 GBP per night and receive 300 reserved room, leading to revenue of 90,000 GBP per day. In other words, each firm will equally receive 150 rooms booking with 45,000 revenue per day.
However, it is possible that one of them can cheat and reduce their room price to get more reservation. For instance, if one day The Landmark Bangkok decide to break a promise and secretly prepare the additional room to meet demand at 200 GBP per night, more people will book The Landmark Bangkok from 150 room to 250 room, resulting to increase in revenue at (250 units x 200 GBP) 50,000 GBP. Meanwhile, JW Marriott will have no choice, but follow the price 200 GBP per night to maintain their consumer at 150 rooms. Therefore, JW Marriott will result to receive lower revenue at (150units x 200 GBP) 30,000 GBP on that day. The way JW Marriott action followed what The Landmark moved, called Tit for tat strategy. To be clearer. It's the strategy in which behavior of the next period of time depends on another player's action on the previous period.
Table 1: Demand Schedule for hotel business in Ploenjit, Bangkok
Price of room per night (GBP)
No. of rooms
Total Revenue per night
500
100
50,000
400
200
80,000
300
300
90,000
200
400
80,000
100
500
50,000
0
600
–
Regarding figure 3 below, it illustrated how two hoteliers react if one fails to keep cooperative. The revenue of JW Marriott Bangkok depended on what The Landmark Bangkok behaved. There are 4 possibilities as per below
Case 1: if both players do tit for tat strategy in which collude and remain at 300GBP per night, they each will enjoy maximizing revenue at 45,000 GBP/day.
Case 2: if The Landmark Bangkok considers cheating and adjusting price from 300 to 200 GBP per night, and JW Marriott does tit for tat strategy, The Landmark Bangkok will receive 50,000 GBP per day, while JW Marriott gains 30,000 GBP per day at that period. Later, they both are going to get 40,000 GBP afterward.
Case 3: In contrary, if The Landmark secures to play tit for tat, but JW Marriott chooses to always cheat, the outcome will conversely turn The Landmark to get first-period revenue at 30,000 GBP/day, whereas JW Marriott grants 50,000 GBP/day. Thereafter, they both will get 40,000 GBP.
Case 4: If both players play always cheat at the first start, they each will make 40,000 GBP/day.
Figure3: Payoff Matrix between JW Marriott Bangkok and The Landmark Bangkok in case of how firms interact by tit for tat strategy
To prolong maximum revenue after renovation, JW Marriott Bangkok should go for tit for tat strategy if they think that The Landmark Bangkok will remain to be in tit for tat, too. Under this circumstance, JW Marriot Bangkok should better set the price at 300 GBP per night and prepare 150 rooms a day to get more profit over time. Even though it is possible that The Landmark can choose to cheat, they logically prefer not to because they would end up lower their revenue at 40,000 GBP/day instead of 45,000 GBP/day in the long run. However, if someday in the future JW Marriott Bangkok is willing to leave the business, it is suggested to be a first mover to cheat in order to gain higher profit in one period of times.
Conclusion
In summary, it can be confirmed that the decision on refurbishment is the best choice, according to our approach through the game theory concept. Moreover, it can be recommended that collusion with a key player like The Landmark Bangkok would be another way to possibly maximize our revenue. Under this condition, 300 GBP per night would be the best fit for all, given both players expect to secure their revenue in long run. Although game theory would be one of best approaches to realize general rule of logic, it is difficult to adapt in actual world situation in which more than two players are in the market. Furthermore, there are some external factors such as policy and regulation that might not be able to evaluate by this concept.