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Dan Hill asks
Why does the liklihood of free internet decrease as the hotel price increases?
My answer: The more expensive the hotel, the more likely it will have many business travelers. Those people are less price sensitive, especially for add-ons. The greater dispersion of valuations also increases the incentive to price discriminate and, in essence, charge them a higher rate. If Internet service is averaged into the basic price, Internet users receive an implicit discount. Why offer that discount to your business travelers? Steve Landsburg wrote a short piece on this for Slate.
Here is Dan's original question.
Posted by Tyler Cowen on June 27, 2006 at 04:59 PM in Economics | Permalink
Comments
Is there any empirical backing to the initial claim, or just a number of anecdotes?
Posted by: Jake at Jun 27, 2006 6:31:09 PM
Herr Cowen,
- As hotel prices increase, you are paying more for basically the same services. So if “free internet” is a part of those services, then it’s not really free anymore.
- As hotel prices increase, people travel less so they find entertainment online instead. Moreover, businesses will conduct more transactions online rather than in person. With all the increased use and dependency on internet services, naturally there will be an incentive on the part of ISPs to charge or charge more for their service.
- To the extent that they are ‘like’ services (complements) (i.e. entertainment/business etc…) an increase in one would cause an increase in the other.
- Using the internet allows people to find better deals on hotel rooms, (less search costs). So, the hotel industry could collude with ISPs/the technology sector to reduce the ability of people to obtain rooms at a lower price. One way to do that is to limit access to the internet by imposing a cost on it. Thus, hotel prices would increase.
Posted by: Chairman Mao at Jun 27, 2006 6:37:49 PM
I think this might be overthinking things. Isn't the simpler answer that nicer hotels don't need additional services to attract customers, but that cheaper hotels have to offer this type of perk to provide a reason to stay there (since they don't differentiate themselves based on quality)?
Posted by: Geoff at Jun 27, 2006 6:40:10 PM
Chairman Mao:
Hotels are all about real esate, where only three things matter: location, location, and location. So your first three points strike me as daft: an "indentical" hotel in a poorer location is not a near-substitute.
Tyler's parent post, however, makes a lot more sense. There are at least two reasons why someone would pay up for a more expensive hotel: (1) the patron places a high value on the improved location or (2) the patron is less price-sensitive. Price discrimination via $20/day internet and $10 in-room drinks allows those who principally value the improved location (eg me) to keep their costs down while those who don't care so much about costs (eg those on expense accounts) are encouraged to hand over more money.
Posted by: tylerh at Jun 27, 2006 7:06:06 PM
Reading all the past history, I thought this question was answered more convincingly in the comments of the previous post. The more expensive hotels have a much higher proportion of business travelers on expense reimbursements who are going to be myopic customers where no one will say $20 for internet is stupid.
Best Western customers are more likely to be families and other price sensitive customers who will laugh in your face at $20.
Posted by: BillWallace at Jun 27, 2006 7:19:32 PM
Tylerh,
You are placing too much emphasis on location. Furthermore, it’s relation to internet access costs is weak.
- In most cities, Hyatts, Sheratons and Hiltons exist side by side with the HoJos and Econolodges; not to mention the middle tier brands. If a patron places a high value on the improved location, he/she can still find low budget hotels in good locations.
- In my experience, free internet access has not been limited to lower budget or poorer location hotels. There is little correlation today mainly because the package of internet and hotel room is still relatively new and adjusting.
- It’s not location, rather it’s services, signaling and the desire to be with people of like class that creates variety in hotels.
- As far as hotels rooms are concerned, there is no such thing as free internet access today. How much you pay for it depends on the quality of the hotel.
Posted by: Chairman Mao at Jun 27, 2006 7:37:18 PM
It's not the concentration of business travelers -- in fact chains that are geared towards business travelers like Hilton Garden Inn, Marriott Courtyard, and Four Points tend to make wireless a no cost item as a brand standard. It's the cost conscious business traveler that gets the mid-priced chain with no-cost add ons like internet and breakfast.
Posted by: Gary at Jun 27, 2006 9:16:05 PM
IMHO, quality of internet access is a big factor in this. Most of the hotels I've stayed in with "free" internet have a single wireless network which doesn't really cover the entire building; I've frequently had to leave my room to sit in the lobby or by the ice machine to get a signal. Leaving your room is a cost, BTW.
The ones that charged for internet access, OTH, generally have an in-room connection, either wired or wireless, with a branded service provider name. I know people who've worked for companies that specialize in setting this kind of internet access up for hotels, and it involves major, expensive wiring projects designed for robust service.
Also, "location" is too vague and may involve correlation rather than causation. In most of the US cities where I've travelled, the nicer hotels fall into two categories: (1) new chain hotels with free breakfast, internet, and no hotel bar, usually located near airports, interstates, or shopping mall (i.e. in the suburbs or high-growth "exurban" areas; (2) downtown hotels, both chain and freestanding, with bars and sit-down restaurants, usually in older and taller buildings.
Location, therefore, may just be a proxy for age. Older buildings are more expensive to wire and may have more interference due to old wiring techniques, thicker walls, etc. It is much cheaper to put internet access into a new hotel than into an old stately dowtown hotel.
Posted by: DK at Jun 27, 2006 10:00:42 PM
I work for a Fortune 50 company that has a hard rule that employees will not be reimbursed for internet access. This tends to push us toward more midpriced hotels, that have free internet access.
Not sure if this was the original intent, but it (indirectly) saves the company a ton of money.
Posted by: Doc McClenny at Jun 28, 2006 1:51:52 PM
Well, I can at least answer Steve's question about why internet access is often free and popcorn is (almost) never free: trying to charge for internet access doubles the cost, but for popcorn it adds very litte. The guy who charges you for your popcorn already has to scoop it out for you, and already has to charge you for pricier items like hotdogs or nachos, so it costs very little to have him ring up the popcorn as well. But for internet access, charging means building authentication into the infrastructure, having a desk clerk who understands the basic concept of connecting and has the time to give out connection codes, and having some sort of phone help available if things go wrong. Additionally, if you want to make sure that the sci-fi convention can't all share the same password, then you need to put much more money yet into authentication.
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