International Journal of Hospitality Management 90 (2020) 102611

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International Journal of Hospitality Management

journal homepage: www.elsevier.com/locate/ijhm

Free add-on services and perceived value in competitive environments: T

Evidence from online hotel reviews
Shan Liua, Baojun Gaob,*, Michael Gallivanc, Yeming Gongd
a
School of Management, Xi’an Jiaotong University, Xi’an, 710049, China
b
Economics and Management School, Wuhan University, Wuhan, 430072, China
c
Coles College of Business, Kennasaw State University, Kennasaw, GA, USA
d
EMLYON Business School, Ecully Cedex, 69134, France

A R T I C LE I N FO A B S T R A C T

Keywords: This study investigates how free add-on services affect customers’ perceived value in horizontal and vertical
Hotel free add-ons competition. We collected 349,879 reviews about over 3000 hotels in 25 U.S. cities from TripAdvisor. Using
Perceived value three balanced data sets generated by coarsened exact matching, the ordered logistic regressions show that free
Online review hotel add-on services (including free breakfast, parking, and WiFi) positively affect consumers’ perceived value.
Horizontal competition
However, increased horizontal and vertical competition differentially weakens the positive effects of free add-on
Vertical competition
services. We not only observe a negative moderating effect of horizontal competition, but also identify three
patterns of the marginal effects of these three add-ons in horizontal competition. The moderating effect of
vertical competition exists from the higher-grade hotel segment to a lower-grade hotel, but such an effect is
insignificant from the lower-grade hotel segment to a higher-grade hotel. Therefore, hotel managers should
consider diverse external competitive environments and design appropriate differentiated service strategies.

1. Introduction
Many firms today provide free products or services to attract con-
sumers or induce changes in customer preferences (Caplan et al., 2010).
Typical examples include free trials offered by software companies and
free hotel amenities. This pricing strategy is based on the common
belief that free products or services add value to consumers and thus
increase their willingness to purchase (Shampanier et al., 2007). Such a
strategy is prevalent in the service industry, including hotels. Free
amenities (e.g., free WiFi, breakfast, and parking) can be regarded as
add-ons to the core hotel services (i.e., hotel rooms) and are advertised
by many hotels (Lin, 2017). Although the effects of free services – also
known as the “zero-price effect” – have been studied in marketing area
(Shampanier et al., 2007), the value of free add-on services is poorly
understood in the hospitality sector.
Two deficiencies can be identified in prior studies. First, research
has investigated free effects among public goods, online service, and
digital products (Caplan et al., 2010), but the effects of hotel free ser-
vices, especially add-on services on hotel customers’ perceived value
has not been examined. Moreover, whether free goods and services
generate higher value has led to contradictory results in the few studies
that exist in other industries. Shampanier et al. (2007) found that zero-
price products yield higher perceived value. Subsequent studies have
confirmed this effect and found that zero price affects value in two
approaches and can be applied in two-component services and pro-
ducts, where a particular component (e.g., breakfast) is combined with
another service or product (e.g., hotel room) (Nicolau and Sellers, 2012;
Palmeira, 2011). However, more recent studies argue that free products
and services may not enhance value, due to opportunity or hidden costs
(Gal and Rubinfeld, 2016). A few scholars even found evidence that the
free effect is small and sometimes free goods have lower perceived
value than paid ones (Caplan et al., 2010; Mao, 2016). This contra-
diction leaves open the question of whether hotel free add-on services
affect consumers’ perceived value. Understanding this issue can help
managers make better pricing decisions.
Second, although some studies have examined free effects, they
focus primarily on the free product or service itself and ignore the in-
fluence of external competition, i.e., whether competitors also provide
identical free goods. Few attempts have been made to provide a joint
perspective of the internal (e.g., free add-on service) and external (e.g.,
competition) factors that affect perceived value. Understanding this
issue is critical in the hospitality industry because many hotels offer free
add-on services and competition in this area is very strong (Brandon-
Jones et al., 2016). Chellappa and Kumar (2005) argued that product

⁎
Corresponding author.
E-mail addresses: shan.l.china@gmail.com (S. Liu), gaobj@whu.edu.cn (B. Gao), mikegallivan@yahoo.com (M. Gallivan), gong@em-lyon.com (Y. Gong).

https://doi.org/10.1016/j.ijhm.2020.102611
Received 6 July 2019; Received in revised form 23 June 2020; Accepted 28 June 2020
0278-4319/ © 2020 Elsevier Ltd. All rights reserved.
S. Liu, et al.
competition will change the free price strategies of web-based services
in web-based markets. The effects of free services on consumers’ per-
ceived value will be reduced if numerous firms provide the same free
goods, because the marginal utility of the free services becomes small.
The lodging industry is often characterized as a sector with intensive
horizontal and vertical competition (Lin, 2017). Horizontal competition
often occurs among direct competitors (e.g., hotels with the same star
level), whereas vertical competition (e.g., hotels with different star le-
vels) is relatively indirect. Therefore, investigating the mechanism by
which the value effects of free add-on services change with the intensity
of horizontal and vertical competition is important for managers be-
cause they often need to make fast decisions in response to competitors’
marketing initiatives.
Addressing such problems is critical because free add-on services
increase the cost for firms and managers want to avoid unnecessary
expenditures if these free add-on services fail to increase perceived
consumer value. This study seeks to answer two questions: (1) do free
hotel add-on services, such as free breakfast, parking, and WiFi, im-
prove consumers’ perceived value? (2) Does horizontal and vertical
competition moderate the effect of free add-on services on perceived
value such that the value of those services is reduced when they are
offered by most hotels?
To address our research questions, we collected more than 300,000
reviews on over 3000 hotels in 25 U.S. cities from TripAdvisor. We
controlled for selection bias in our sample by using an advanced
method, Coarsened Exact Matching (CEM, (Iacus et al., 2011, 2012).
Our ordered logistic regression indicates that free add-on services do
enhance perceived value, but increased horizontal and vertical com-
petition from the adjacent higher-grade hotel segment weakens the
value-enhancing effect of free add-on services. These findings provide
support to hotels’ decision to offer free services when designing pricing
strategies. Moreover, given the negative moderating effect of compe-
tition, hotels should also try to provide unique free add-on services –
ones not duplicated locally.
2. Literature review and hypothesis development
2.1. Effect of free services
Price and value have been longstanding topics of discussion in
marketing (Zeithaml, 1988). Price is generally acknowledged to exert
negative influence on customers’ perceived value (Dodds et al., 1991).
It also affects customer satisfaction through customer value. Compared
to quality, price influences customer value to a more extent (Varki and
Colgate, 2001). In the hospitality sector, Ye et al. (2014) found that
price negatively affects perceived value but is positively correlated with
perceived quality. Following this logic, discounting seems to be a ty-
pical marketing tool seeking to enhance customers’ perception of the
value of goods and services. The lowest end of the price continuum lies
“zero price,” which may be deemed as an extreme form of discount.
Discounted and free goods may appear similar, according to Zeithaml
(1988), since they both reduce the sacrifice consumers must make and
thus would result in similar, enhanced perception of value. However,
others claim that a zero price is qualitatively different in the eyes of
consumers from normal discounts (i.e., free is a ‘special price’ with
greatly enhanced value) (Shampanier et al., 2007). An explanation for
differences in perceived value between free services and normal dis-
counts is that the mention of price acts as a trigger for consumers to
regard services according to different norms. Consumers respond to
“market norms” if a non-zero price is stated for a good or service vs.
“social norms” in the presence of zero-price conditions (McGraw et al.,
2003; Heyman and Ariely, 2004; McGraw and Tetlock, 2005). Mar-
keting scholars created a zero-price model (i.e., zero-price can create
value and significantly differs from non-zero price) (Shampanier et al.,
2007), which was replicated and extended (Nicolau, 2012; Baumbach,
2016).
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International Journal of Hospitality Management 90 (2020) 102611
Despite prior research in this area, two gaps remain. First, we ob-
serve contradictory findings, whereby the zero-price effect was shown
to increase perceived value in a few studies (Nicolau and Sellers, 2012;
Palmeira, 2011; Papies et al., 2011), while others presented evidence
either that special zero-price effect was statistically insignificant (Gal
and Rubinfeld, 2016), or that a very small or “token” price is better
than zero (Mao, 2016). Some researchers even found that free services
are perceived to be valuable in certain circumstances but of no value in
other situations (Fruchter et al., 2011; Baird et al., 2016). Thus, further
research is required to clarify this issue. Also, existing studies seldom
examine the effects of free services on perceived value in the hotel
sector (see Nicolau and Sellers, 2012 for an exception). This is sur-
prising, since hotels typically provide a variety of free add-on services
(e.g., free breakfast, parking, and WiFi) to appeal to customers and
improve their satisfaction levels (Bulchand-Gidumal et al., 2011). Such
free add-on services can significantly influence a customer’s decision of
which hotel to choose (White, 2015). Therefore, we attempt to bridge
these research gaps in our study.
2.2. Perceived value
Perceived value is a critical concept in the hospitality field due to its
close linkage to hotel profit. Perceived value is defined by Zeithaml
(1988) as the holistic evaluation of the utility of product weighing
benefits against costs. It is significantly related to the revenues and
profit of a firm because high perceived value of consumers often in-
creases the number of products or services that consumers intend to
purchase (Geng and Shulman, 2015). Bolton and Lemon (1999), how-
ever, viewed it as the maximum amount consumers would pay. Per-
ceived value has implications for a wide variety of results. It can be a
predictor of behavioral intention to accept mobile hotel reservation
service and other similar services which are frequently employed as a
common practice by hotels (Wang and Wang, 2010). A process for
defining perceived value formation among hotel guests was also de-
veloped (Sabiote-Ortiz et al., 2016). This study was consistent with
Zeithaml (1988), in defining perceived value as a holistic evaluation of
the utility of product weighing benefits against costs.
In the service sector, many studies use online reviews to investigate
perceived value (Ryu and Han, 2010; Ye et al., 2014). Online reviews
represent an important type of big data that are generated in large
volumes, at high velocity and in various formats (Mariani et al., 2019b).
As the customers’ self-reported, actual and archival data, online reviews
differ from perceptual interviews and survey data in terms of volume,
velocity, and richness. Thus, such reviews offer an effective approach to
capture actual consumer’s attitude toward the services and value per-
ceptions. Although the overall rating, as an indicator of customers’
satisfaction, has been widely used in prior research (Bulchand-Gidumal
et al., 2011; Ye et al., 2014; Mariani et al., 2018), the specific “value”
rating can better reflect the perceived value. Therefore, this study
employs consumers’ online value ratings as the measurement of their
perceived value.
2.3. Free add-on services and perceived value
Our study focuses on three free hotel add-on services: free breakfast,
free parking, and free WiFi. According to a global survey, breakfast and
free WiFi are ranked by guests as the most valuable hotel amenities, and
free parking is also among the “top five” most desirable amenities
(Hotels.com, 2014). Although prior studies failed to prove a direct re-
lationship of free add-on services on perceived value, there is indirect
evidence of such effects. Ye et al. (2014) found that the lower the price
that guests pay for the hotel service, the higher value they perceive.
Thus, free hotel add-on services, which have a “zero price,” should
logistically be related to high perceived value. Bulchand-Gidumal et al.
(2011) have found that hotel guests are more satisfied with and leave
higher ratings at hotels offering free WiFi than ones that do not.
S. Liu, et al.
Moreover, a laboratory study in Spain found that free breakfast en-
couraged subjects’ choices in favor of booking their hotels (Nicolau and
Sellers, 2012).
Based on the zero-price model, we posit that free add-on services
will increase perceived value. Based on prior work (Shampanier et al.,
2007), customers regard a zero-price good in a qualitatively different
manner than they do a discounted or low-price good (e.g., discounted to
$1). This means that prospective hotel guests do not just subtract cost
from benefit when free service and a discount of equal value are offered
because consumers view discounts and free in different norms; instead,
consumers overestimate the benefits and underestimate the underlying
cost when they receive free add-on services. For example, the demand
for a low value hotel with free breakfast is high and they regard it as
more valuable than a relatively higher value hotel without free break-
fast. Zero price is much more powerful than a substantial price discount
where the price is still above $0 (Gal and Rubinfeld, 2016). Further-
more, the ‘net gain’ of free products is more conspicuously perceived by
customers than comparable products with a discounted but positive
price (greater than $0) (Shampanier et al., 2007). In the hospitality
sector, the ‘anchor theory’ of Palmeira and Srivastava (2013) best ex-
plains the phenomenon because free amenities are regarded as “sup-
plementary” services. While discounted services are perceived as a
‘natural anchor’ for their real price, the value of free add-on services is
considered commensurate with that of the focal service. Thus, we hy-
pothesize that:
H1. Free hotel add-on services (i.e., free breakfast, parking, and WiFi)
positively affect perceived value of consumers.
2.4. Competition, free add-on services, and perceived value
The lodging industry is often characterized as an intensively com-
petitive sector because many hotels can provide similar services and
customer demand is usually geographically selective (Lee, 2015). Pre-
vious literature frequently analyzed the horizontal competition among
hotels, based on the assumption that hotels with similar star levels in
the same geographic area face competition for similar demand (Lee,
2015; Viglia et al., 2016). Prior studies have argued that different types
of competition among hotels change price strategies to offer amenities
(Lee, 2015; Viglia et al., 2016). Competition acts as a moderator for
pricing policies (Becerra et al., 2013), and competition is conditional on
service differentiation in the hotel sector (Lee, 2015). Thus, we posit
that the value effect of free add-on services is moderated by competi-
tion.
Horizontal competition exists among hotels of the same grade.
According to Bharadwaj et al. (1993), price and differentiation are two
positional competitive advantages. When price competition is more
intense, hotels will engage in non-price competition in services to dif-
ferentiate themselves. In our case, free hotel amenities (e.g., free
breakfast, parking, and WiFi) can be regarded as add-on services for the
core service (i.e., hotel room) of hotels. When free amenities are of-
fered, on the one hand, consumers avoid having to pay extra fees. On
the other hand, they receive free services which otherwise may not be
offered by other competitors. Thus, offering free amenities can trigger
both price and differentiation advantages by softening competition. As
the ratio of hotels offering similar free services increases, the prior
advantages of service differentiation and the utilities of consumers may
gradually diminish (Rajagopalan and Xia, 2012). Therefore, we hy-
pothesize:
H2. The positive effects of free add-on services on consumers’ perceived
value are moderated by horizontal competition. As the ratio of free add-
on services offering increases in the same hotel segment, the effects of
such services on perceived value decreases.
Hotels are often vertically differentiated. However, this vertical
differentiation role of the add-on service is absent in the extant
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International Journal of Hospitality Management 90 (2020) 102611
literature on add-on pricing, which focuses on unobserved add-on
prices with horizontal or no differentiation (Ellison, 2005). Compared
with the higher-end hotels, the lower-end ones are more likely to pro-
vide free add-on services if the cost is sufficiently small because the
roles of free add-ons differ for higher- and lower-end hotels (Lin, 2017).
To screen consumers who are willing to pay for high-quality services,
higher-end hotels sell add-ons at high prices. Nevertheless, lower-end
hotels tend to provide free add-ons to lure some price sensitive custo-
mers. These customers would choose the higher-quality hotels if the
lower-end hotels do not provide the free add-ons. Thus, lower-end
hotels with free add-ons obtain the advantages of lower price and ser-
vice differentiation relative to the higher-end hotels without free add-
ons.
Vertical competition exists between two adjacent hotel grade seg-
ments. On the one hand, lower-grade hotels face competing pressure
from higher-grade hotels in the same geographical area. Given the
differential roles of free add-ons, the comparative price advantages and
service differentiation of a lower-grade hotel offering free add-ons will
gradually decrease when more higher-grade hotels provide the same
free add-ons in a market with vertical differentiation. As a result, cus-
tomers’ value perception on the free add-ons of lower-grade hotels will
be lower.
On the other hand, higher-grade hotels may also face competing
pressure from lower-grade counterparts. Higher-grade hotels target
higher-taste customers who are willing to pay for the more expensive
base service. For lower-grade hotels, offering free add-ons is an ap-
proach to lure some price sensitive customers from the higher-grade
hotels (Lin, 2017). However, for a higher-grade hotel offering free add-
on services, the increasing ratio of free add-on provisions in the ad-
jacent lower-grade hotel segment will not make the relative price of this
higher-grade hotel lower. Thus, competing pressure from an adjacent
lower-grade hotel segment will not decrease the perceived value of
higher-grade hotels’ free add-ons. Therefore, we hypothesize the fol-
lowing:
H3a. The positive effects of free add-on services on consumers’
perceived value are moderated by vertical competition. For a lower-
grade hotel, the positive effects of free add-on services decrease as the
ratio of free add-ons offering increases in the adjacent higher-grade
hotel segment.
H3b. For a higher-grade hotel, the positive effects of free add-on
services do NOT decrease as the ratio of free add-on services offering
increases in the adjacent lower-grade hotel segment.
3. Methodology
3.1. Data and variables
3.1.1. Data source
We collected data from TripAdvisor.com. TripAdvisor is the most
popular global travel community and has been served as data source for
many previous studies (Hu et al., 2019; Gao et al., 2020). To improve
the generality of our results, we chose the US cities listed in “Top 25
destinations – USA”, according to Travelers’ Choice on TripAdvi-
sor.com. In April 2016, we programmed a crawler by using Python to
scrape the hotel reviews from January to December 2015. After omit-
ting reviews for hotels without a star level and those that missed any of
the six dimensional ratings, we obtained 349,879 reviews covering
3008 hotels for the 25 leading U.S. cities. For each review, we obtained
the various review level variables, as well as the characteristics of re-
viewers and hotels.
3.1.2. Dependent variable and research variables
On TripAdvisor, reviewers are asked to provide an overall rating
and six dimensional ratings for hotel: Room, Location, Cleanliness,
S. Liu, et al.
Service, Sleep Quality and Value. Value reflects the extent to which the
overall quality of a hotel is worth the money paid and is affected by
price and benefits received (Ye et al., 2014). We therefore used the
Value rating as our dependent variable because we focus specifically on
consumers’ perceived value. Given that the overall rating reflects cus-
tomers’ overall satisfaction including the value, we also used overall
rating as a dependent variable to check the robustness of our results.
We created three dummy variables – Free_WiFi, Free_Breakfast and
Free_Parking – to indicate whether the hotels offer free WiFi, breakfast
and parking or not. To capture the effect of horizontal and vertical
competition, we first divided the hotel markets into various market
segments based on the hotels’ city location and grade (1–5 stars). Then,
we compute the ratio of hotels in each market segment that provided
the free add-on services as the measurement of competition, denoted as
Per_Bre_Seg, Per_Par_Seg and Per_WiFi_Seg, respectively. The percentage
of free add-on provisions in the same segment, in the adjacent higher-
grade segment, and in the adjacent lower-grade segment confined by
city and hotel stars are the measurements for horizontal competition,
and vertical competition from the higher- and lower-grade hotel seg-
ments.
3.1.3. Control variables
Perceived value is shaped by price and benefits received (Ye et al.,
2014). Thus, we controlled the effect of price and quality. Our analysis
was conducted at the review level. However, it is impossible to know
the exact price each customer has actually paid based on the public
data. Therefore, we used the median of hotel price ranges for a standard
room (scraped from TripAdvisor) as the hotel price proxy. Among the
six dimensional ratings, Rooms, Location, Cleanliness, Service, and Sleep
Quality are proxies for hotels’ quality. To avoid redundancy and mul-
ticollinearity, we first conducted Principal Component Analysis, which
yielded a single quality factor score, denoted as Quality. This quality
factor captures 67.1 % of the variance of the five initial variables.
We used individual reviewer-level data rather than the aggregated
hotel level data. Reviewers’ personal characteristics can influence their
ratings (Gao et al., 2018; Mariani et al., 2019a). Thus, we scraped
various reviewers’ attributes from their TripAdvisor profile pages and
controlled these variables in the empirical model, including whether
reviewers disclosed their identities and geographic locations, their
gender, age, badge level, and travel type (e.g., business, leisure, visiting
family, etc.). Given that the distribution of ratings varies across dif-
ferent hotel grades (Mariani and Borghi, 2018), and to account for the
impacts of destination and time on service evaluation (Gao et al., 2018),
we controlled the fixed effects of hotel grade (1–5 star), city and the
month of review by introducing three sets of dummy variables.
Table 1 summarizes the Operationalization of variables. Table 2
presents the descriptive statistics and correlations.
3.2. Empirical model
Consistent with the literature (Gao et al., 2017, 2018), we use an
ordered logistic model because value ratings (the dependent variable)
are censored and ordered data. We specified the ordered logistic model
as follows:
Pr (Value _Ratingijt = k ) = Pr (λk − 1 < Uijt ≤ λk )
Uijt = β1 Freej + β2 Percentage . Freej + β3 Freej
× Percentage . Freej + β4 Pricej
+β5 Qualityijt + β6 No _Identity _Disci + β7 Location _Disci
+β8 Femalei + β9 Mid _Ageit + β10 Mid _Ageit
+θ1 TripCollective _Levelit + θ2′ CityIDj + θ3′ Hotel _Gradej
′ Table 3, the three interaction terms are all negative and significant,
+θ4′ Timet + εijt
(1)
In Equation (1), The value Value_Ratingijt = {1, 2, 3, 4, 5} represents
that reviewer i provided for hotel j at time t. Uijt is the underlying
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International Journal of Hospitality Management 90 (2020) 102611
variable that captures the reviewer’s value evaluation; k is an integer
from 1 to 5, indicating a realized value of a rating; λ1 through λ5 are
cutoffs parameters, which are used to determine intervals for each rank
of the value ratings. Freej indicates if hotel j provides free breakfast (free
parking or free WiFi), while Percentage Freej refers to the ratio of hotels
in the market segment of hotel j which also provides the corresponding
free amenities. In Equation (1), β1 and β3 are our interests of research,
which capture the main effect of free amenity on reviewers’ value rating
and the moderating role of competition, respectively.
As to the control variables, except for the quality of hotel service
(Quality), we control various characteristics of reviewers, including
whether a reviewer disclose his/her identity (No_Identity_Disc) and lo-
cation (Location_Disc), the gender (Female), age (Mid-Age and Old_Age)
and TripCollective Level of reviewers. Since TripCollective Level is a ca-
tegorical variable, we treat it as a vector of dummies. We also introduce
three set of dummy variables (three vectors) to control the effects of
hotel location (CityID), hotel grade (1–5 stars) and review time in
months. Thus, the coefficients θ1′, θ2′ , θ3′ and θ4′ are four vectors capturing
the effects of reviewers’ TripCollective Level, hotel location, hotel grade
and review time on ratings.
3.3. Coarsened exact matching
We aim to investigate whether the provision of free amenities really
“cause” higher perceived value. The causal effect of a free amenity on
value rating is the difference between the value ratings with and
without the presence of free amenity. Unfortunately, we can never
observe this causal effect directly because the same unit with and
without the treatment condition (free amenity) cannot be observed si-
multaneously. However, we may construct a set of reviews that are on
average the same except for the presence or absence of the treatment by
matching.
Matching aims to optimize observations from data to enhance the
balance between the treatment and control groups in the data, thus
ensuring that the groups have similar empirical distributions of all
covariates (Iacus et al., 2012). Without matching, imbalance in the data
will lead to model dependence and, thus, bias the estimated coeffi-
cients. Among the available matching methods, we used CEM (Iacus
et al., 2011, 2012), which achieves balance automatically without ex-
tensive post-matching assessment.
We construct matching samples based on these covariates: City,
Hotel_Grade, Per_Bre_Seg (or Per_Par_Seg, Per_WiFi_Seg) and Price for hotel
level attributes; and Quality, Age, Gender, No_Identity_Disc, Location_Disc,
and TripCollective_Level for reviewer-level attributes. For Free_Breakfast,
Free_Parking and Free_WiFi, the CEM algorithm yielded matched data
sets with 95,699, 43,805, and 164,396 observations respectively, which
are the samples for empirical analysis.
4. Results
4.1. Hypotheses testing
Table 3 presents the results for the case of horizontal competition, in
which Columns (1), (3) and (5) are the results of the baseline models
and Columns (2), (4), and (6) are the results of the full model with
interactions. In each column of Table 3, the coefficients of Free_WiFi,
Free_Breakfast and Free_Parking are positive and significant at 0.001
significance level, indicating the consumer perceived value is higher
when hotels offer free add-ons. Thus, H1 is supported. This confirms
previous studies that also showed a significant, positive effect of free
services or products on perceived value (Nicolau and Sellers, 2012). In
indicating that, as the ratio of hotels in the same market segment of-
fering the free amenity rises, the positive effects of these free add-on
services decreases. Thus, H2 is supported. The results highlight the
moderating role of horizontal competition on the effects of free add-on
S. Liu, et al. International Journal of Hospitality Management 90 (2020) 102611

Table 1
Operationalization and type of variables.
Variables Operationalization

Dependent Variable
Value_Rating 5 levels of value ratings provided by reviewers on TripAdvisor
Research Variables
Free_WiFi 1 if free Wi-Fi provision exists, 0 otherwise.
Free_Breakfast 1 if free breakfast provision exists, 0 otherwise.
Free_Parking 1 if free parking provision exists, 0 otherwise.
Per_WiFi_Seg Percentage of free Wi-Fi provision in the same segment confined by city and hotel star rating
Per_Bre_Seg Percentage of free breakfast provision in the same segment confined by city and hotel star rating
Per_Par_Seg Percentage of free parking provision in the same segment confined by city and hotel star rating

Major Control Variables

Price Median of hotel price range shown in the amenities tab of each hotel on Tripadvisor. This price range is based on average rates for a standard room.
Quality Combining ratings covering service, location, cleanliness, room and sleep quality by principal component analysis

Reviewer Level Controls

No_Identity_Disc Indicates whether a reviewer disclose his/her age and gender on TripAdvisor. Equals 1 if his/her did not disclose either age or gender, and 0 otherwise.
Mid_Age and Old_Age Reviewers on TripAdvisor may self-disclose their ages. We coded the age to three groups, Young_Age (younger than 34), Mid_Age (35−49) and Old_Age
(older than 50) and set the Young_Age as reference level.

Female 1 for female, 0 otherwise.

Location_Disc Indicates whether a reviewer disclose his/her location. Equals 1 if a reviewer disclosed his/her location, 0 otherwise.
TripCollective Level TripCollective is an advanced contributor program of TripAdvisor that evaluates reviewers’ contributions to TripAdvisor. A reviewer can earn
TripCollective points by writing reviews, posting photos, and sharing ratings, etc. Reviewers’ TripCollective level appears in the traveler’s profile and
includes six levels. We took level one as reference level and used five dummies for the other five levels.
Business 1 for travelling on business, 0 for others

services on value perceptions. lower-grade hotel segment.

Table 4 presents the results for the case of vertical competition, in
which Columns (1)–(3) and (4)–(6) indicate how vertical competition
from the adjacent higher- and lower-grade hotel segments moderates
the perceived value of focal hotels, respectively. In Columns (1)-(3) of
Table 4, the three interaction terms are all negative and significant.
Thus, the positive effects of free add-on services decrease as the ratio of
adjacent higher-grade hotel segment offering these services rises.
Consequently, H3a is supported. However, in Columns (4)–(6) of
Table 4, none of the three interaction terms are negative and sig-
nificant. Thus, the positive effects of free add-on services do not de-
crease as the ratio of adjacent lower-grade hotel segment offering these
services increases. Therefore, H3b is supported. Vertical competition
can induce lower-end hotels to offer free add-ons so as to lure price
sensitive customers from the higher-grade hotel segment (Lin, 2017).
These findings provide useful insights for the effectiveness of free add-
ons by indicating that such a benefit decreases with the increase of
vertical competing pressure from an adjacent higher-grade hotel seg-
ment but is unaffected by the competing pressure from an adjacent
4.2. Additional analysis and robustness check
Given that the positive effects of free add-ons decrease with the
increase of competition, we further identify when these free add-on
services have positive effects by analyzing their marginal effects. Fig. 1
depict how the marginal effects of free add-ons vary when competition
changes based on the method of Berry et al. (2012). Fig. 1 indicates that
although the marginal effect for all three free add-ons decreases with
the increase of competition, each has a distinct pattern. The marginal
effect of free breakfast shifts from positive to insignificant, and then to
negative. In contrast, the marginal effect of free parking is always po-
sitive, and the marginal effect of free WiFi is initially positive, but then
becomes insignificant.
We speculate that these different marginal effects may be associated
with room price because the room price is much higher than the price of
breakfast, parking, and WiFi – and such high prices may hurt customers’
perceived value. To confirm this insight, we regressed the average price

Table 2
Correlation and statistics.
Mean SD Min Max (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)

(1) Value_Rating 4.04 1.05 1 5 1

(2) Avg_Price 197 110 32.9 1140 −0 1
(3) Quality −0.02 1.84 −7.5 1.68 0.75 0.2 1
(4) Free_WiFi 0.52 0.5 0 1 0.09 −0.1 0.05 1
(5) Free_Breakfast 0.21 0.41 0 1 0.04 −0.2 −0 0.33 1
(6) Free_Parking 0.38 0.48 0 1 0.05 −0.5 −0.1 0.11 0.15 1
(7) Per_WiFi_Seg 0.52 0.25 0 1 0.02 −0.2 −0.1 0.53 0.42 0.08 1
(8) Per_Bre_Seg 0.24 0.27 0 1 0 −0.4 −0.2 0.37 0.62 0.26 0.68 1
(9) Per_Par_Seg 0.38 0.41 0 1 0.05 −0.6 −0.1 0.11 0.19 0.85 0.14 0.36 1
(10) TripCollective 2.18 1.74 0 5 −0.1 0.12 −0 −0.1 −0.1 −0.1 −0.1 −0.1 −0.1 1
(11) Business 0.18 0.39 0 1 −0.1 0.06 −0 −0.1 −0.1 −0.1 −0.1 −0.1 −0.1 0.07 1
(12) Identity 0.35 0.48 0 1 −0 0.07 −0 −0.1 −0 −0.1 −0.1 −0.1 −0.1 0.45 0 1
(13) Young Age 0.09 0.29 0 1 −0 0.01 −0 −0 −0 −0 −0 −0 −0 0.15 −0 0.44 1
(14) Middle Age 0.15 0.35 0 1 −0 0.05 −0 −0 −0 −0 −0 −0.1 −0 0.26 0.02 0.57 −0.1 1
(15) Old Age 0.11 0.31 0 1 0.01 0.03 0.03 −0 0.01 −0 −0 −0 −0 0.26 0.01 0.48 −0.1 −0.1 1
(16) Female 0.18 0.38 0 1 0.01 0.04 0.01 −0 −0 −0 −0 −0 −0 0.25 −0.1 0.63 0.33 0.36 0.25 1
(17) Location_Disc 0.96 0.2 0 1 0 −0 −0 0.01 0.01 0.02 0.01 0.02 0.02 −0 0 0.14 0.06 0.08 0.07 0.08 1

5
S. Liu, et al. International Journal of Hospitality Management 90 (2020) 102611

Table 3
Ordered logistic estimation results for the horizontal competition.
Dependent variable: Value_Rating

(1) (2) (3) (4) (5) (6)

Free_Breakfast 0.059*** 0.284***

(0.015) (0.032)
Per_Bre_Seg −0.033
(0.083)
Free_Breakfast × Per_Bre_Seg −0.539***
(0.061)
Free_Parking 0.215*** 0.375***
(0.021) (0.052)
Per_Par_Seg −0.043
(0.116)
Free_Parking × Per_Par_Seg −0.266**
(0.083)
Free_WiFi 0.041*** 0.095**
(0.010) (0.030)
Per_WiFi_Seg 0.168**
(0.057)
Free_WiFi × Per_WiFi_Seg −0.104*
(0.049)
Price −0.951*** −0.964*** −0.811*** −0.801*** −1.084*** −1.089***
(0.040) (0.041) (0.063) (0.070) (0.029) (0.029)
Quality 1.286*** 1.288*** 1.349*** 1.331*** 1.334*** 1.333***
(0.007) (0.007) (0.010) (0.010) (0.005) (0.005)
Location_Disc 0.009 0.010 −0.027 0.061 0.018 0.018
(0.034) (0.035) (0.050) (0.050) (0.025) (0.025)
No_Identity_Disc −0.078* 0.079* 0.121* −0.023 −0.055* 0.054·
(0.038) (0.039) (0.061) (0.065) (0.026) (0.028)
Middle Age −0.0001 0.001 −0.098 −0.051 −0.004 −0.005
(0.038) (0.038) (0.061) (0.064) (0.027) (0.028)
Old Age −0.058 −0.057 −0.091 −0.076 −0.005 −0.005
(0.041) (0.040) (0.068) (0.069) (0.029) (0.030)
Female 0.106*** 0.106*** −0.015 0.055 0.077*** 0.077***
(0.030) (0.030) (0.047) (0.048) (0.022) (0.023)
Business −0.075** −0.078** −0.114** −0.149*** −0.158*** −0.156***
(0.025) (0.026) (0.037) (0.033) (0.017) (0.018)
City Fixed Effects Yes Yes Yes Yes Yes Yes
Hotel Grade Fixed effects Yes Yes Yes Yes Yes Yes
Time Fixed Effects Yes Yes Yes Yes Yes Yes
TripCollective Level Yes Yes Yes Yes Yes Yes
Observations 95,699 95,699 43,805 43,805 164,396 164,396
AIC 154,672 154,586 67,454 67,443 271,763 271,757

Notes: 1. We report asymptotic standard errors robust to heteroskedasticity in parentheses. 2. ***, ** and * indicate significant at 0.001, 0.01 and 0.05 significance
level, respectively. 3. Due to page limits, the estimates of four intercepts for each ordered logistic model and Reviewers’ TripCollective Level (Level 2–6) are not
reported.

of each hotel on Free_Breakfast, Free_Parking and Free_WiFi controlling
for fixed effects of city and hotel grade. As such, we focus on the effect
of free add-on services on price within the same market segment.
The regression results are shown in Table 5. The relationships be-
tween these three free add-on services and hotels’ average price differ
notably. Hotels in a given hotel segment offering free breakfast typi-
cally charge higher prices, hotels with free parking typically charge
lower prices, and the relationship between free WiFi and the price is
insignificant. Therefore, having a higher room price changes the mar-
ginal effect of free breakfast from positive to negative because con-
sumers may believe that the high room price may include the actual
price of breakfast, which is even greater than the value of free break-
fast. On the contrary, although they decrease with the increase of
competition, the marginal effects of free parking and free WiFi are al-
ways non-negative because the provision of such add-ons is not asso-
ciated with higher room price.
On TripAdvisor, the overall rating reflects the customers’ overall
satisfaction about the hotel service, including the value. Therefore, to
check the robustness of our results, we replaced the dependent variable
with the overall rating and conducted another analysis. The results are
shown in Table6. Columns (1)-(6) of Table 6 indicate that the main
effects of the three free add-ons are positive and significant, but the
interactions are negative and significant except for the free WiFi
interaction in Column (6). Thus, the free add-ons can improve custo-
mers’ value perceptions and such effects decrease with the increase of
horizontal and vertical completion from the adjacent higher-grade hotel
segment. In Columns (7)–(9), none of the three interactions are nega-
tive and significant, thereby indicating that vertical competition from
the adjacent lower-grade hotel segment cannot decrease the value of
free add-ons. Thus, our results are robust even using the overall rating
as dependent variable.
5. Discussions, implications and limitations
This study explores the collective effect of horizontal and vertical
competition and free add-on services on consumers’ perceived value in
the hotel sector. Our results indicate that the positive effects of free
hotel add-ons decrease in competitive environments. Several theore-
tical and practical implications can be derived of based on the results.
5.1. Theoretical implications
First, this study contributes to the hospitality literature by extending
the zero-price effect in the hotel sector (Shampanier et al., 2007;
Palmeira, 2011). Our results reveal that various free hotel add-on ser-
vices significantly affect perceived value. This finding addresses a prior

6
S. Liu, et al. International Journal of Hospitality Management 90 (2020) 102611

Table 4
Ordered logistic estimation results for the vertical competition.
Dependent variable: Value_Rating

Competition from adjacent higher-grade hotel segment Competition from adjacent lower-grade hotel segment

(1) (2) (3) (4) (5) (6)

Free_Breakfast 0.143*** 0.158***

(0.022) (0.017)
Per_Bre_Seg −0.865** −0.559***
(0.302) (0.121)
Free_Breakfast × Per_Bre_Seg −0.764*** 0.478***
(0.103) (0.090)
Free_Parking 0.345*** 0.234*
(0.034) (0.101)
Per_Par_Seg 0.502** −0.548
(0.191) (0.730)
Free_Parking × Per_Par_Seg −0.189* −0.005
(0.083) (0.121)
Free_WiFi 0.108** 0.086***
(0.035) (0.011)
Per_WiFi_Seg −0.280· −0.575***
(0.147) (0.072)
Free_WiFi × Per_WiFi_Seg −0.243** 1.003***
(0.076) (0.075)
City Fixed Effects Yes Yes Yes Yes Yes Yes
Hotel Grade Fixed effects Yes Yes Yes Yes Yes Yes
Time Fixed Effects Yes Yes Yes Yes Yes Yes
Other Controls Yes Yes Yes Yes Yes Yes
Observations 84,395 37,714 92,408 79,408 32,480 149,970
AIC 135,144 56,397 147,166 131,322 50,152 256,232

Notes: 1. We report asymptotic standard errors robust to heteroskedasticity in parentheses. 2. ***, ** and * indicate significant at 0.001, 0.01 and 0.05 significance
level, respectively 3. Due to page limits, the estimates of all control variables and the four intercepts for each ordered logistic model are not reported. 4. Per_Bre_Seg,
Per_Par_Seg and Per_WiFi_Seg in Column (1)-(3) and Column (4)-(6) refer to the percentage of free add-ons offering in the adjacent higher- and lower-grade hotel
segment, respectively.

contradiction whereby free products or services were found to affect
value positively in some studies but not in others (Nicolau and Sellers,
2012; Caplan et al., 2010). Our findings further extend the hospitality
literature by revealing the positive effects of three free add-on services
on customers’ perceived value and implying that zero-price effect exists
in more than one hotel service.
Second, we contribute to zero-price theory by introducing external
factors (i.e., competition) into this model. Our results show that hor-
izontal and vertical competition from the adjacent higher-grade hotel
segment negatively moderate the effects of free hotel add-on services on
perceived value. This finding can provide a possible explanation for
why some scholars failed to detect positive effects of free goods on
perceived value (Gal and Rubinfeld, 2016; Caplan et al., 2010; Mao,
2016). This may occur due to the moderating effect of competition: if
most competitors offer a free add-on service, the contribution to
perceived value will decrease. Unlike previous studies that contend that
the environment is either competitive or uncompetitive (Fiocco, 2012),
this work confirms that an increased level of competition can change
the value perception of free add-ons from positive to insignificant and
negative. Therefore, various levels of competition lead to different va-
lues of free add-on services.
Third, this research contributes to the service literature by ex-
amining how vertical competition moderates the effect of free add-on
services on perceived value. We illustrate that the vertical competition
from the adjacent higher-grade hotel segment mitigates the positive
effect of free add-on services and that the vertical competition from the
adjacent lower-grade hotel segment does not weaken their effective-
ness. The asymmetric effects of vertical competition arise from the
differential roles of add-ons for hotels of different grades (Lin, 2017).
These findings imply that although the provision of free add-ons lures

Fig. 1. Marginal effects of free breakfast, free parking and free WiFi.
Notes: (1) The vertical axes on the left indicate the magnitude of the marginal effect. (2) The histograms on the bottom of each plot show the distribution of
observations in the sample on competition (Per_Bre_Seg, Per_Par_Seg, and Per_WiFi_Seg) depicted on the horizontal axis. (3) The solid line is the computed marginal
effects given different values of competition and gray area are 95 % confidence intervals of the marginal effects.

7
S. Liu, et al. International Journal of Hospitality Management 90 (2020) 102611

Table 5 free effects.

The relationship between free amenity provision and price.
Dependent variable: Price 5.2. Managerial implications

(1) (2) (3) Our research also has practical implications to managers. First,
Free_Breakfast 6.364***
given that free hotel add-on services positively affect consumers’ per-
(1.772) ceived value, hotel managers can provide free add-on services to attract
Free_Parking −4.368* potential customers. They can enlarge the scope of free amenities with
(1.924) acceptable costs to increase the value of hotel because different types of
Free_WiFi 3.430
free add-on services (i.e., free breakfast, free WiFi, and free parking)
(2.489)
Constant 138.828*** 100.640*** 128.411*** positively affect perceived value.
(5.758) (6.279) (6.148) Second, the negative moderating effects of horizontal and vertical
City Fixed Effects Yes Yes Yes competition from the adjacent higher-grade hotel segment enable hotel
Hotel Grade Fixed effects Yes Yes Yes managers to design appropriate strategies for offering free add-on ser-
Observations 1589 905 1906
Adjusted R2 0.868 0.778 0.825
vices. In uncompetitive environments, hotels should offer free add-on
F Statistic 349.658*** 114.327*** 301.339*** services even if they are market leaders because doing so will increase
perceived value. However, in a highly competitive environment, if
Notes: 1. Asymptotic standard errors robust to heteroskedasticity appear in more hotels in the same segment or in the higher-grade segment offer
parentheses. 2. ***, ** and * indicate significant at 0.001, 0.01 and 0.05 sig- the same free service, the positive effects of such goods will be reduced.
nificance level, respectively. Under such a scenario, an optimal strategy for hotels is to reduce the
price of hotel rooms (focal product). Another strategy is to differentiate
customers from higher-grade hotels, its effectiveness depends on the themselves by focusing on offering novel free add-on services that their
ratio of the free add-on service offering in the higher-grade hotel seg- competitors don’t offer. Hotels can shift some of their efforts from the
ment. provision of free services to other aspects of their services. They can
Finally, this study provides methodological contributions by in- increase special features of the free amenities (e.g., a mix of free wes-
troducing CEM method in the hospitality context. The majority of tern and eastern breakfast) or provide unique free add-on services.
previous studies used experiments or surveys with linear regression to Third, given that different free add-on services show various pat-
explore free amenities. However, our study addresses the limitations of terns in their marginal effects, the strategies should also vary in terms of
such methods by controlling for endogenous factors and analyzing the free amenity provisions in a competitive environment. Hotels can still
pure causal relationship based on objective observational data. Future provide free parking and WiFi when a high ratio of other hotels offer
research can also adopt CEM method to address the relevant issues of such add-on services because the provision of such amenities do not

Table 6
Robustness check: ordered logistic estimation results using the overall rating as dependent variable.
Dependent variable: Overall_Rating

Horizontal Competition Vertical Competition from adjacent higher-grade hotel Vertical Competition from adjacent lower-grade hotel
segment segment

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Free_Breakfast 0.311*** 0.209*** 0.225***

(0.036) (0.024) (0.056)
Per_Bre_Seg 0.119 −0.570· −0.254·
(0.089) (0.318) (0.145)
Free_Breakfast × −0.359*** −0.502*** −0.022
Per_Bre_Seg
(0.066) (0.111) (0.103)
Free_Parking 0.340*** 0.419*** 0.406***
(0.055) (0.036) (0.121)
Per_Par_Seg 0.449*** 0.080 −0.347
(0.068) (0.200) (0.836)
Free_Parking × −0.209* −0.401*** −0.207
Per_Par_Seg
(0.086) (0.085) (0.144)
Free_WiFi 0.156*** 0.235*** 0.023
(0.035) (0.038) (0.057)
Per_WiFi_Seg −0.134* −0.822*** −0.147·
(0.065) (0.152) (0.088)
Free_WiFi × Per_WiFi_Seg −0.112* −0.064 0.356***
(0.056) (0.082) (0.090)
City Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Hotel Grade Fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Time Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Other Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 95,699 43,805 164,396 84,395 37,714 92,408 79,408 32,480 149,970
Chi2 95,234 41,510 154,561 104,697 45,782 113,566 91,667 38,177 168,562

Notes: 1. We report asymptotic standard errors robust to heteroskedasticity in parentheses. 2. ***, ** and * indicate significant at 0.001, 0.01 and 0.05 significance
level, respectively. 3. Due to page limits, the estimates of all control variables and the four intercepts for each ordered logistic model are not reported. 4. Per_Bre_Seg,
Per_Par_Seg and Per_WiFi_Seg in Column (1)-(3), Column (4)-(6), and Column (7)-(9) refer to the percentage of free add-ons offering in the same segment, the adjacent
higher- and lower-grade hotel segment, respectively.

8
S. Liu, et al.
damage perceived value. However, free breakfast is of little marginal
value or is even harmful in such a situation. Given that the offering of
free breakfast is associated with higher room price, consumers may
think that the hotels provide free breakfast through increased room
price and thus consider a negative value of free breakfast. Thus, hotel
managers should also balance the value of free add-on services with the
overall room prices when they decide to offer these free services.
Finally, critical service attributes can improve customers’ online
satisfaction ratings (Mariani et al., 2019b). This study contributes to
this stream of literature by revealing the positive effects of free add-ons
on customers’ value perception. Given the importance of hotel service
attributes, online review platform managers can highlight the features
of free hotel add-on services in their descriptions to attract potential
users because free add-on services are valued by consumers. On the
basis of this information, platform managers can also help hotel man-
agers understand competitive conditions by providing information on
free hotel add-on services in the market so that hotel managers can
devise appropriate strategies to offer different free amenities.
5.3. Limitations and future research directions
We acknowledge four limitations in our study. First, we only fo-
cused on three representative free add-on services of hotels, namely,
free breakfast, free parking, and free WiFi. Although including other
free add-ons will inevitably complicate the model, they may have si-
milar or different effects compared with our study. A second limitation
lies in our data. This study was conducted using reviews posted in 2015
that covers more than 3000 hotels in 25 U.S. cities. Therefore, whether
the results apply beyond the boundary of the focal country and time can
be explored in future research. Third, although we controlled for var-
ious reviewer characteristics, the reviewer's country of origin, culture
(Gao et al., 2018; Mariani and Predvoditeleva, 2019), and language
(Mariani et al., 2019a) may also influence their ratings. Finally, hotels
constitute the most location-sensitive segment. A hotel’s proximity to a
central business district or the airport may potentially influence cus-
tomers’ value perception (Lee and Jang, 2011). However, fine-grained
hotel location information is not controlled in our model.
We can explore three directions in future research. First, we can
examine whether our model can be applied in other free add-on services
or products and whether similar results can be obtained. Second, we
can include other potential moderators (e.g., hotel size, capacity, and
chain condition) suggested by previous research in the model because
different types of firms may vary in the effects of free add-ons. Third,
we illustrate that offering free add-ons can improve customers’ value
rating. However, the “gain” in terms of higher value ratings is attained
at the cost of offering free amenities. Although higher ratings can drive
the sales of hotel rooms (Mariani and Visani, 2019; Yang et al., 2018),
whether the provision of free add-ons can enhance hotel profitability
and efficiency remains unaddressed.
Acknowledgements
This work was supported by the [NationalNatural Science
Foundation Program of China] under Grant [71771182, 71722014,
91646113 and 71471141]. We also appreciate the Youth Innovation
Team of Shaanxi Universities “Big data and Business Intelligent
Innovation Team.”
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