The central focus of this study is to provide an empirical explanation regarding the efficacy of the managerial expectation formation process as it contributes to the understanding of discounting room rates as a rational strategic phenomenon in the lodging industry. The study assesses the nature of the relationship between discounting hotel room rates and hotel financial performance when considering the non-stationary conditions of a time series data set. The study was rooted in an operational based perspective with regard to the challenges presented by the perishable nature of room night sales - the loss of which may impact a manager’s fundamental responsibility: to generate maximum revenue from the existing hotel room capacity. Of critical importance to this study is whether the incremental use of discounting room rates could work to correct for temporal periods of decreased demand and thus increase shortterm hotel financial performance. There is limited research regarding the empirical relationship between discounting room rates and hotel financial performance, as well as the internal process that a hotel manager uses to determine an accurate room rate that corresponds to seasonal lodging market demand conditions. An empirical foundation for this practice is lacking in the extant hospitality literature. Literature reveals that, although the lodging industry commonly incorporates discounting as a pricing strategy, recent research implies that high occupancy levels at discounted room rates do not necessarily lead to an increase in hotel financial performance. The contrast then between what is practiced and the recommendations from pricing strategy studies has led to lack of consistent agreement in current lodging literature regarding how discounting of hotel room rates relates to hotel financial performance. This study is at the forefront in its use of the methodological procedures that support a theoretical framework iv capable of providing explanations regarding managers’ internal process of discounting as an effective pricing strategy that could compensate for times of decreased room demand. An econometric case study research design was used in conjunction with a cointegration analysis and an error correction model (none of which are otherwise appropriated as assessment tools in the lodging industry). These applications provide a means to understand the expectation formation process of managers’ room price setting strategies. They also assess the empirical nature of the relationship between the variables by accounting for the erratic variations of room demand over time as induced by random error fluctuations. A non-deterministic system was assumed and supported through the analysis of the stationarity conditions of the time series data set under investigation. The distinguishing characteristics of a dynamic system that are recognized as traits of the lodging industry are further supported by the theoretical framework of the rational expectations theory and the cobweb model. The results of the study are based on secondary financial data sets that were provided by a midscale independently owned leisure hotel in the Orlando, FL market and that is located on Walt Disney World property. The results of this study delineate from the current normative economic recommendation based on descriptive research that claims discounting hotel room rates does not increase hotel financial performance. The current study does not draw an association between the variables from the presupposition of a deterministic marketplace, nor does it recommend to managers to hold a constant average daily rate over time. Based on the findings of the statistical procedures performed and the theoretical framework, the study contends that previous research may have incorrectly modeled room price expectations; elected to use inappropriate statistical tests; and, therefore, may have entertained misleading conclusions regarding the relationship between discounting of hotel room rates and hotel financial performance. v Through use of an error correction model, the major findings of this study imply several concepts: that residuals may be treated as a variable within the study’s model in order to better understand the short run dynamics that may lead to equilibrium correcting room price positions over the long run of time; that discounting room rates works in the short run; and, that managers use a rational price setting strategy to set future room rates. All of the aforementioned concepts fall within accordance of the rational expectations theory. The study concludes that while the constant room rate adjustments observed in the lodging industry may display what appears to be a random structure that deviates from the expected systematic, or stable, financial performance of a hotel over time, the deviations in performance are actually a rhythmic synthesized process of market information from past and current times. Hence, hotel managers appear to be using a backward looking model to forwardly project optimal room rates to match uncertain consumer demand. The empirical assessment employed in this study supports this determination
