DECA Hospitality and Tourism Cluster Practice Exam

What pricing strategy is a chain of hotels using if they rent rooms at extremely low rates to eliminate competition?

1. Price lining

2. Promotional pricing

3. Predatory pricing

4. Price fixing

The correct answer is: Predatory pricing

The pricing strategy being utilized is predatory pricing, which involves setting prices extremely low to drive competitors out of the market or prevent them from entering. This strategy can involve significant financial risk for the business implementing it, as they may incur losses in the short term while hoping to dominate the market in the long term. In this context, the hotel's chain is strategically lowering its room rates to a level that may be unsustainable for competitors. The intention is to attract price-sensitive customers who might otherwise choose other hotels, thereby increasing the chain's market share. Once the competition has been diminished or eliminated, the hotel chain could then increase prices to more sustainable levels. Promotional pricing, while also a low-rate strategy, is typically more temporary and aimed at specific sales goals such as encouraging short-term bookings or increasing market visibility, rather than a means to eliminate competition. Price lining involves establishing a series of prices for a range of products or services, which doesn’t apply here, while price fixing refers to an illegal agreement between competing firms to set prices at a certain level, which is distinct from the tactics of individual pricing strategies aimed at market control.