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.


mhertz

I would be a little surprised if those prices are priced for a 1:1 ratio. That is, though I am fairly confident that the $10.95 in the lobby is for 1 person, I'd be a little shocked if the $300 wasn't a flat rate in the ballroom for an entire corporation's users. If it was $300 a head, that really would be exceptional.

www.acsh.org

I learned the concept of price discrimination from an employee at Home Depot while I was shopping for a sink.

I needed an "undermount" sink to go beneath my new granite countertop. This type of sink was priced approximately 50% more than the otherwise identical "overmount" sink. The size, design, materials, etc. were all identical except for the curve of the lip of the sink.

The salesman hypothesized that "The manufacturer figures if you can afford granite over formica, you can afford to pay more for the sink that goes with it...they just want their share."

turbosaab

Is the potential ill will worth it? As much as being gouged gets under my skin personally, my guess is that the $300 charges are mostly charged the expense accounts of large corporations and not even questioned.

Great example from Home Depot. I've noticed this as well when shopping for stoves - the "slide in" models designed for center islands are outrageously priced, considering the minor difference in shape and control placement.

fuat

I agree with mhertz. I suspect the ballroom price is not a single-user price, but for everyone attending an event in the room. No corporate expense account would tolerate a $300/user/day charge for Internet connectivity.

Many of the hotels I go to these days, especially the cheaper ones like Marriott Courtyards, have free wireless (and/or wired) Internet service in rooms and in public places. On the other hand, fancier hotels feel like they haven't gouged enough with the room tarriff, so they add on Internet charges. The worse I've seen is £25/day in London at a posh hotel.

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JanneM

We're very social creatures, and are very attuned to fairness in a social sense. We are extremely good estimators of relative status, relative worth of things (in a social sense), and whether and how much we're being taken for a ride compared to our peers. Simple economic models do not take the social value of goods, services and the interaction with them into account, however, so they don't capture this aspect.

With that in mind, price discrimination is probably normally a bad idea. You need to design the pricing so that our unfairness detectors don't go off, or a lot of people will refrain from buying no matter how "fair" it is in a strict supply-demand kind of sense. Worse, with people feeling they're getting ripped off, they'll have no hesitation loudly announcing it to their peers (which includes half the internet if their bullhorn happens to be large enough), and they'll have no compunction about ripping off the company in turn since it's "fair"; I wouldn't be surprised if there's a correlation between perceived unfair pricing of Wifi and other charges on one hand, and the level of petty theft of towels, bathrobes, and so on on the other.

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Developer

I'm sure the $300 covers the entire facility and anyone who would be using it there under a certain passcode.

Given the larger number of people in the banquet using the single paid connection, more bandwidth is being used which the hotel pays for and it must be recouped.

The hotel installs an expensive, high-capacity line that can handle a lot of traffic, then recoups most of the cost through the corporate bookings. Individuals probably won't be able to account for that cost alone, thus the higher rate.

Sorry if that was fragmented/redundant, I'm exhausted. Hopefully I made my point.

cogdog

Don't be so sure fuat. My organization, an educational not for profit group, held a conference in a 4 or 5 star hotel frequented by those in the medical field. Internet charges for breakout rooms and the halls where based on $200 a line, not $200 for the crowd, and it was worse than that... it was $200 **per IP** so if I paid for my laptop, and you plugged yours in the same line-- kaching! another charge. We punted where possible, but it clearly is not a charge based on what the service costs to provide.

To the hotel's miniscule defense, the charges were fixed by the outside network provider, and we were told the public space fees were higher due to some FCC status compared to the in-room charges (our conference attendees are heavy net users, and their demand brought the network to a crawl most nights).

Such places are to be completely avoided in our future.

Developer

Interesting...I stand somewhat corrected.

johna

I also wouldn't assume it's for more than one computer.

My wife works for a volunteer conference that operates at a Hilton, and needed internet access in the hallway outside the conference rooms. The charge was $500 per computer per day. They got a discount, but it wasn't for multiple computers.

It's not just the computers either. Everything has a price. Apparently they even installed switches for the power plugs. Getting them turned on = $30. Per plug.

KMore77

Many services of this type are offered based upon value of service rather than cost. How valuable is it to the buyer of a large group in the ballroom. Also, business can usually directly pass some or all of it on to attendees in the form of registration fees, or indirectly to customers through the sale of products or services. Depending on the industry the business is in, it may be considered table stakes for the audience.

wcw

It does baffle a fellow, though. My behavior would appear to fall under #6's point about fairness: the last month I've taken a couple business trips to Chicago on someone else's dime. The first time I booked cheap and easy, and was displeased to discover that the Sheraton charges ~$15 on top of the room charge for 'net access.

As a result, the second time, I "let" the folks paying my bills book the room. I banked on a high probability of a swankier setup with internet included, a bet I won. Sure, the swankier hotel cost three times as much, but the internet was free. Since I wasn't paying the bill either way, why should I endure even a moment's displeasure at someone else's chintziness?

Sometimes economic but antisocial behavior gets punished in the end.

pkimelma

I am suspicous of the FCC and public spaces argument since most hotels' lobby and lobby bar wireless internet is normally the same price as the room. I think it is just gouging people trapped in a conference area. On the other hand, I suppose the local Starbucks or other coffee shop benefits as people decamp at breaks to get cheap access and coffee.

Jeremy Cherfas

If it is any consolation, this pricing structure seems more common in developed countries. I've stayed in hotels in Lima, Peru, with all-you-can-eat wireless everywhere for free and fancy ones in France that have absurd hourly charges that aren't even for an hour of actual use, but an hour of time from when you first log on.

I guess everybody here is aware of Joel Spolsky's interesting piece on price discrimination in software: http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html

Joan

JanneM in #6 is spot on with her comment about the correlation between folks feeling gouged and petty theft, but I'd take that even farther. If they can't get their pound of flesh from the hotel, they'll get it from some other rich, faceless company somewhere down the line. Good or bad, it's human nature to try to get back what one feels has been unfairly taken.

dg

As we all know, hotels gouge on long-distance telephone calls. (Something to do with information - it's easy to compare room rates, but you don't find out the charges for long distance until you're already in the room and have little choice.)

But how's this for price discrimination. I went to an economics conference at a fancy hotel (Ritz Carlton - Half Moon Bay, CA) and made two very short calls (1 or 2 minutes) to England. On checkout, I found out the cost was $150!!! I complained and said that I knew that hotel phone calls were expensive, so I expected maybe $10 or $15, but not a hundred and fifty. The woman at checkout didn't flinch, just tapped on the keyboard and said "okay, I changed it to $15."

This is not price discrimination based on any profile of buyer. It's much more raw than that. People who don't complain and are willing to pay $150 pay that. People who say "I wouldn't pay more than $X" pay $X. Just walking down the demand curve.

dg

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Paul Turnbull

While the hotels charge conferences per connection this can be handled by using routers.

When I set up our AGM (I work for a large union) I usually order two internet connections. On each one I put the same kind of router I use in my home and establish two private LANS. Then I connect our computers to those. The hotels and conference halls we use have never complained about this as they charge per IP and I'm only using two even though I may have 30 or 40 computers running through them. The last two years I've been using secure wireless to cover the floor area as well.

alipkin

Amazon tried using price discrimination back in 2000, as a way to see how different customers reacted to different pricing schemes. The problem, of course, is that the same technology that allows companies to study patterns of customers (computers) and tag them for different pricing schemes (the internet and web browsers) also allows users to recognize these schemes. Once folks at the various bargain-hunting sites figured out what was going on (and that eliminating cookies could get rid of a price that was too high), Amazon dropped the policy (as far as I know, at least -- they may just be doing a much better job of implementing it).

finnadat

Conferences and exhibitions are exceptional cases of price discrimination.

The theory is that there are fewer dates when there are conferences and the ability of the vendors to make money is confined to these times, they charge more. Does this validate Las Vegas Convention Center charging $1.50 per bottle of water that you bring into the hall as a give-away, no, but they do it because they can.

Conventions/tradeshows are chosen and attended primarily by where they are held – and items such as electric and catering costs are often not considered if attendance is good (the only true measure of a “good” show). Market theory would indicate that cities wanting to attract more convention business would lower their costs to exhibitors (in exorbitant fees such as $3k for 15IP addresses) and to attendees in the form of discounted travel and accommodation, but that doesn't consider the real estate mantra of location, location, location.

It is an interesting thought and with the internet decreasing the “need” for tradeshows (it used to be one of the only ways to find out what the competition is doing); will cost and acceptance of price discrimination be less tolerable?

I don't know, but I also don't know if spending $1.5 million on a 3 day exhibition is a worthwhile marketing expenditure either.

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finnadat

I also just got a convention pricelist for a show in New Orleans this fall. Wireless is not available and a shared internet service with 1 (yes one) IP address is $1,295 with additional IP addresses (and yes, each device connected to the network must have an IP address) is $144. If you want 248 IPs you can get it for $11,700.

and this is for a tradeshow that lasts about 30 hours. It is the "cost of doing business" but it doesn't reflect the true cost of what is being provided.