When is free hotel Web access not free?

How the dismal science applies to your life.
Feb. 1 2006 12:11 PM

How Much Should Hotel Web Access Cost?

Sometimes it's free. Sometimes it's $20 a day. Why?

I am writing this in a room at the Boston Park Plaza, where I am paying $10.45 a day for a cruddy Internet connection. My last column was written at the Hyatt Regency on Washington, D.C.'s, Capitol Hill, where the connection was free.

And so it goes. I stay in a lot of hotels. Many offer free Internet; others charge through the nose. What's driving this?

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You might guess that some hotels are just greedier than others. They charge for Web access, while less greedy hotels give it away. But that theory will never do. If you did want to give your customers a break, why would you give them free wireless instead of cheaper rooms?

To see what's going on, you've got to recognize the real problem afflicting a profit-maximizing hotel manager: Some guests are willing to pay more than others. That makes for an unpalatable choice: If you charge $100 for a room, you give an unnecessary discount to everyone who would have paid $120. But if you charge $120, you drive all the $100 customers away.

The goal, then, is to use amenities to equalize your customers' willingness to pay. Take a stripped-down example: You've got two customers, Jack and Jill. Jack will pay $100 for a room without net access; Jill will pay $120. That poses a pricing problem. But suppose you happen to know that Jack will also pay an extra $20 for net access, while Jill thinks computers are instruments of the devil. Now the pricing problem is solved: Make net access free. Both customers will pay exactly $120 for the room-plus-net package, and that's what you charge.

In this example, it would be dumb to make Jack pay $20 for his Internet. Then you could charge only $100 for the room—otherwise Jack would walk—and you would be giving Jill an unnecessary $20 discount.

But of course I just invented this example, and I could have invented it differently. If Jack and Jill are each willing to pay, say, $110 for a room without Internet, you might as well charge them each $110 and then hit Jack up for an extra Internet charge.

The real world is more complicated. You've got more than two customers, and you have only guesses, not certain knowledge, about their willingness to pay. Still, the general lesson holds: If you think you've got a bunch of guests who are avid Internet users but cheapskates when it comes to paying for the room (for example, if there's a science fiction convention in town), you want to make the Internet free. Then you can lure in the cheapskates without lowering the room price very much. But if your Internet users are willing to pay more than everyone else (for example, if there's a Google shareholders' convention in town), then for goodness' sake, sock it to them, charging them the full room rate and adding an Internet fee on top of it.

Different hotels face different customer mixes, so different hotels find different solutions. The same principles explain why local phone service (or access to the gym) at a hotel can range anywhere from free to about 100 times its actual cost.

OK, then. The theory predicts that anything can happen, and observation confirms the theory: Anything does happen.

That's pretty good. Unfortunately, when I apply the same theory to an analogous problem, the results are far less satisfying. The other problem is one I revisit every few years: Why is popcorn so expensive at the movie theater?

In every important respect, the popcorn pricing problem is identical to the Internet pricing problem. If Jack will pay $10 to see the movie and Jill will pay $12, but Jack really loves popcorn, then a greedy profit-maximizing theater owner will offer to shower Jack with free popcorn until he's willing to pay $12 to get in.

But if Jack and Jill are each willing to pay $12 to see the movie, that same greedy profit-maximizing owner will charge them both $12 and bleed Jack dry at the popcorn stand.

Sometimes the numbers should work out one way; sometimes the other. Yet in the real world, popcorn, unlike wireless Internet, is never free.

It's logically possible that by pure coincidence the numbers at every movie theater in the world all work out the same way, while the numbers at hotels work out one way half the time and the other way the other half. But "pure coincidence" theory is even less satisfying than the "differential greed" theory. There must be something I'm missing that makes popcorn essentially different from Internet access. I remain stumped.

Steven E. Landsburg is the author, most recently, ofMore Sex Is Safer Sex: The Unconventional Wisdom of Economics. You can e-mail him at armchair@landsburg.com.

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