In 2010, of a total of 67,000 rooms on the Las Vegas Strip, Caesars Entertainment managed 22,880, while MGM Resorts managed over 12,000.

In 2010, of a total of 67,000 rooms on the Las Vegas Strip, Caesars Entertainment managed 22,880, while MGM Resorts managed over 12,000. However, owing to the Great Recession and new hotel openings, between 2008 and 2010, MGM’s hotel occupancy decreased from 92% to 89%, while its average daily room rate fell from $148 to $108. Meanwhile, CityCenter, managed by MGM Resorts, and the Cosmopolitan opened with 4,000 and 3,000 rooms respectively, and the 1,720-room Sahara closed.  (Sources: Caesars Entertainment Corp., Annual Report 2010; MGM Resorts, Annual Report 2010; “Sahara’s closure on May 16 will mark `the end of an era’,” Las Vegas Sun, March 11, 2011.)

(a) Using a suitable figure, explain how the opening of CityCenter and the Cosmopolitan affects the residual demand for an existing hotel and how it should adjust prices.

(b) If MGM Resorts had not reduced its room rates, what would have been the effect on occupancy?

(c) Use the Cournot model to explain MGM Resorts’ opening a new hotel and Sahara’s closing.

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