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.


abbottuhhm

I can't speak to this from an economists' viewpoint, as those classes I took are a couple decades behind me, but I can speak to it from a user's view.

It does tick people off to have different prices, but Prof Levitt's point that 'Otherwise, if there was just one price, it would likely be higher than the low price when there are two prices.' is valid.

Take Windows 2000 Pro and Windows 2000 Server, or SQL server's free version. In the case of Windows 2000 Pro, it functions the same as Server in many respects, but there is crippleware installed to prevent more than ten people from connecting to it. SQL Server's free version has a different kind of crippleware added. If the authorized number of connections is exceeded, the databse intentionally sloooowwwss waaayy dowwwwwwwwn. But if MS couldn't charge for SQL Server, or more for Win2K Server, then the free or cheaper versions wouldn't exist.

But it does tick people off. Having to book a cross-country flight for a funeral, the next-day price made me see red until the rep explained that they did have a bereavement exception.

One last point about the hotels' ip prices. I would bet that a lot of this has to do with the managements' looking at IT as its own cost/profit center. They wouldn't dream of making the housecleaning unit pay for itself, or the pool to be a profit center, or the tv in the lounge to bring in profit, but IT because of its large capital costs and relatively new presence in the industry ... I would bet it is often viewed as its own profit center, rather than an operational cost.

Read more...

Maya

This is not just the Hyatt, it is every convention hotel.

There are a few forces at work here, one is that internet connectivity, especially to meeting rooms, is generally provided by a 3rd party which is charging the hotel and dictating the hotel's rates. Many hotels literally have no control over the pricing [when I was organizing technology conventions, I got to the point where I contracted first with internet providers, and then contracted with hotels that used those providers.]

A standard list price would be $750 per day for the connection, and then a per-user fee. Price per IP address is usually $200 or so. This was before wireless was so prevalent. The per-user fee was always the one that killed me, we got around it using a router-device to dynamically assign IP's.

Meetings require much more bandwidth, usually require their own line, and if you are wireless or not you are still utilizing what lies beyond the wall. They also demand much more service and staff time.

This isn't really a true case of price discrimination, a meeting room connection is, in many cases a different product than the connection in the lobby or elsewhere. Is it different if you just have 10 people in a boardroom? Not really. That is why there is a bizarre practice cropping up where people have "squatters" meeting in hotels with large lobbys and free wireless. No one is staying in the hotel, they just meet up inthe lobby, have the meeting, and leave.

Read more...

abbottuhhm

I value hearing about your experience, but....

Nowadays couldn't a hotel have a t1 installed for free and pay far less than $750 a *month*? These days, isp's are guaranteeing uptime, and installing router/firewalls as part of the service. If a coffee shop can provide the service for the price of a cup of coffee, I'm sure there is a way for Hyatt to do it for far less than hundreds of dollars.

robertecooper

One point no-one mentioned is that a lot (most) of the hotels utilize unionized A/V and IT outfits that do ALL of the services within a conference. Not knocking unions or anything but these outfits usually have ridiculously, ridiculously high prices for anything.

I got quoted over $250 to rent a 17" flat screen monitor for a two hour event in New York recently. Needless to say, I went and bought a monitor for about the same price as the two hour rental and had our company a "free" new monitor.

jw

This makes no sense. I have to travel about 4-5 times a year to a hotel (not a conference) and I get free wireless with my $80 room.

I think that this just goes to the basic economic principle that a product or service is worth exactly what somebody is willing to pay for it.

Cost of providing the service sets a floor on the price, and the only thing that sets a ceiling is competition. If you are isolated to a hotel, there is likely no competition or alternative.

dolcevita1972

" 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."

Hmmm. Isn't that precisely what markets do? Won't firms ultimately settle on prices that the optimal number of buyers will consume? I.e when demand meets supply? Whats there to study about that?

smili

I guess if you still had users at those prices you could legitimately call the crackberry an addiction

Blandy

dolcevita,

The topic of pricing does not just end with demand meeting supply (or supply meeting demand if you like it that way).

Firstly, what exactly is demand? You can agregate the overall demand curve for a product, but this would not produce the actual outcome that we see with the hotels. The hotel has effectively separated their business into two markets, one for access in the lobby, and another for access in the conference room. they now face TWO demand curves and therefore can charge two different prices (for another example, think of adult and student tickets at the cinema).

Then you can look at pricing structure. What price will the firm charge for what unit of their good or service? The hotel charges by a per person per day rate (or something similar to that). but it is also feasible for them to charge per hour or per megabyte downloaded.

Obviously to do this the firm must have some sort of market power, but even a good pricing stratergy diferent to other competitors can be enough to create some power.

Read more...

no way out

That reminds me the other day they almost charged me 7 dollars for 15 minutes in the internet zone.. Not the Hyatt Hotel..

Maya

"I got quoted over $250 to rent a 17” flat screen monitor for a two hour event in New York recently. Needless to say, I went and bought a monitor for about the same price as the two hour rental and had our company a “free” new monitor."

Yes, but you are not just paying the cost of the monitor in the rental. You are paying the cost to house and service the monitor, you are paying for the priviledge of a 100% functional monitor [if the monitor did not work, the company you rented for would provide a new one] you are paying your own opportunity cost [if you rented it you don't have to spend the time choosing, buying and transporting, if you are from out of town this could be a high cost, and might include shipping]. And this was clearly not a union situation, because as anyone who has had to do a show in a union house will tell you, sure you can *bring* your own equipment, but you better not plug that monitor in yourself!

Read more...

Mike

Yeah, I just found out for a conference for teachers (mostly high school and a few college professors) that $225 is the base charge for one conference room to be internet enabled with a $75 surcharge per user. As a High School teacher, I was told if I present at the conference, I will have to pay that charge to use the internet. That is more than highway robbery. There is absolutely no incentive for me to even present and all for something that can't cost the hotel more than $10 (if that). The organizer of the conference, a college professor, says he's just used to it and his college will pay the costs . . . doesn't work that way in public k-12 ed.

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.

call2biz.gxs

http://www.call2biz.com
How about launching your store on Call2biz.com with one of your smartest bets, I bet you your hot items will be sold out soon. With its protecting system, your business interest will be guard against those business scams, you wonder like me where to start your business on Call2biz.com, the Call2biz.com is your source of detail information need to do it. We would help you and marketing your products without any charges of fees! You will save up to 100% and earn more easy money on Call2biz.com. with a only computer and phone at your home, you can, while being successful, enjoy this easy-money-making experience online. A homebased business will begin at Call2biz.com.

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.

Read more...

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.