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Will the Merger Change the Pricing Scenario in the Industry?

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Sep. 29 2016, Updated 10:04 a.m. ET

Market control

As we discussed earlier, after the merger, the combined chain will hold one of every 15 hotel rooms globally. However, some cities might see a much higher concentration.

According to CWT Solutions, a business travel consultancy, the combined entity will control almost 50% of the hotel market (in terms of spends) in Minneapolis, 48% in Mexico, and 46% in Los Angeles. In most of the other markets, the duo accounts for at least one-third of the total hotel spends.

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Higher prices

Consolidation means less competition. Basic economics says that this would drive hotel prices higher. The fact that hotel occupancy is at an all-time high also facilitates the price hike. It will be more evident in markets where consumers don’t have alternative options.

In fact, Marriott (MAR) is known to negotiate aggressively on prices with corporate travel customers. Starwood is known to yield in low prices. With the Marriott-Starwood merger, corporate travelers are definitely going to be on the receiving end.

High competition ensures that consumers have cheaper options available. Most companies will often compete on price. The competition ensures higher investments in promotions and infrastructure in order to attract new customers.

For evidence, you just need to look at the airline industry. The airline industry has seen a similar consolidation phase with United’s (UAL) acquisition of Continental Group and American’s (AAL) acquisition of US Airways. Airfares have gone up since then. In 2015, global airfares witnessed a 5% increase.

The situation may not be so dire in the hotel industry. Other large corporate groups like Hilton (HLT), Hyatt (H), and Intercontinental Group (IHG) are still available to compete aggressively with the new Marriott.

Investors can gain exposure to Marriott by investing in the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (RCD), which invests ~1.2% of its portfolio in the stock. Next, we’ll see how this merger can help Marriott challenge online travel giants.

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