What’s a wireless internet connection worth in a Hyatt hotel?
The answer, apparently, depends greatly on where you are in the hotel. In the lobby, a one-day pass to use their wireless internet connection costs $10.95. Not cheap, but standard for nice hotels.
Down in the main ballroom, however, the story is very different. A one-day pass to the internet there costs $300!
Economists have a name for this: price discrimination. It means that a company charges different prices for the same product to different customers. Note that despite the use of the word “discrimination,” economists don’t necessarily think of price discrimination as bad — it is just a method for firms to get more of the surplus away from the consumers. If you are the consumer being charged the lower price, you are glad that price discrimination exists. Otherwise, if there was just one price, it would likely be higher than the low price when there are two prices. It is only when you are the guy down in the ballroom that it feels lousy.
The idea behind this pricing structure, I’m sure, is that individuals are the primary purchasers in the lobby and companies that are running meetings are the primary purchasers in the ballrooms. The companies have very inelastic demand and will pay the high price often enough to make it profitable to serve only a few customers. Still, I wonder if the ill-will generated by such a high price is worth it in the long run.
Price discrimination is everywhere, but rarely have I seen a firm willing to be as blatant as the Hyatt. Pricing is an area that economists don’t study enough. I think there is much work to be done in understanding how firms decide what prices they choose and whether those prices are the “right” ones.