The "terrible outcome" is that if one hotel defects, more are tempted to defect (defect or allow the defector to capture more of the profits), and if all hotels

The "terrible outcome" is that if one hotel defects, more are tempted to defect (defect or allow the defector to capture more of the profits), and if all hotels compete on price, everybody's profit margin is lower. If demand is actually greater than supply, prices rise, but if supply is greater than demand, then the possibility of the price collapsing because of defection is greater.