The applicability of industrial organization theory to the services sector: initial tests from the UK hotel industry

Abstract

Despite the growth of literature on industrial organization and the growth of the services sector in many economies, little work has been undertaken on the former in relation to the latter, especially using econometric techniques. Whilst a set of nested hypotheses are represented by the industrial organization framework the specific competing issues involved cannot be examined in the context of services until the general applicability and relevance of the framework have been established. This paper attempts to address these issues via the medium of the UK hotel industry. The Schmalensee approach is adopted, whereby a general model is constructed and tested to generate a subsequent parsimonious representation of it. Pooled data is used for 65 hotel companies over a 5 year time period. It was found that a dynamic formulation of the hypothesis worked best and the results take on the mantle of ‘stylized facts’. The implication is that the industrial organization hypothesis and framework do have legitimacy for future analyses of, for example, the tourism industry.