Saturday, August 03, 2002

An Economics Question

Not too long ago, I spent the night in a fairly nice hotel -- the kind where valets park your car and all that. I was going to make a long distance call, and looked up the rates. It turned out that the hotel charged $3.50 for the first minute and $1.50 per minute after that! Luckily I had a cheap phone card with me.

To put matters in context, according to this article, the average hotel markup on long distance used to be 6 times the cost, but the trend has been downward due to the pressure of cell phones. Now the markup is usually 1.5 times cost. At the hotel I'm talking about, the markup had to be more like FIFTEEN times cost.

So the question is, why on earth did the hotel charge that much? The seemingly obvious answer is, "To make money."

But does that make sense? At such outrageous prices, hardly anyone would actually use the hotel long distance service anyway; they would use a cell phone or a calling card instead. And out of those who did use the hotel long distance by accident, probably 95% would be infuriated when they got a $17 charge for a mere 10 minute call. In other words, the high rate wouldn't make that much money, and what money it did make would be at the expense of pissing off the customers.

The only people who would pay the charge either knowingly or without complaining would be people who are simply so rich that money means nothing to them. Maybe that hotel gets a lot of those types of customers, but I doubt it. In my (limited) experience, while rich people don't mind spending money on things that they actually value and want, they usually do mind throwing money down the drain for nothing. You generally don't get rich by being completely wasteful.

In fact, the above article quotes representatives from two swanky hotel chains as saying that their customers definitely resent high long distance charges:
"The No. 1 complaint from guests, according to our front desk managers, is the high cost of long-distance calls," Jordan [from Wyndham Hotels] said.
[According to the chief operating officer of New York City's Apple Core hotels], "You're doing yourself a big favor in winning over the customer" when you eliminate phone charges. "If there's one thing that riles hotel guests, it's these payments."

One thought that occurs is that high charges are more likely in hotels that (like the one I stayed at) are not chains. A stand-alone hotel might get away with stiffing you on the ultimate bill, which you find out about only when you're already on your way out the door and likely won't stay there again anyway. But a chain hotel has a greater incentive not to spring unfair charges on you, because that could hurt their operations elsewhere. Even so, though, the stand-alone hotel does a lot of business for conventions and such, which would provide some very substantial repeat business. You'd think that would provide some incentive not to get a reputation as a place that rips people off.

So what's going on here? Is there a rational explanation for this hotel's behavior, at a time when so many hotels are realizing the futility of marking up phone service by a fraction of this hotel's rates?


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