The High Price Of Wi-Fi

routerOne of my weaker columns when I wrote for Slate was a highly unsatisfactory stab at why some hotels charge for wireless and others don’t. Today my wife, who had never seen that column, asked me the same question, and I think my off-the-cuff answer was probably better than anything I said in Slate.

So here’s my new stab at this:

Motel 6, and others of its ilk, tend not to charge for wireless. This is because Motel 6, and others of its ilk, have very little monopoly power, so they can’t jack the cost of wireless up much above the marginal cost of providing it, which is effectively zero. If Motel 6 charged $10 for wireless, the Red Roof Inn next door would charge $9, and so on until the price falls to zero.

The lack of monopoly power is first because, at the low end of the luxury spectrum, there’s little brand loyalty among customers. Also, these motels tend to be located in strips that house many interchangeable establishments.

The high end hotels, however, can have substantial monopoly power, both because of brand loyalty and because of preferred locations. When I visited the Atlanta Federal Reserve, I wanted to be at the Loew’s just down the street.

Now monopoly power alone cannot explain a high price for wireless. If all your customers use the wireless, there’s no point in charging for it separately; you might as well fold it into the room price. In fact, it’s better to fold it into the room price because otherwise some people who are staying for four or five days might choose to pay for only three days of wireless. You can extract more when you can make everyone pay up front.

A more interesting story is that Loew’s has substantial monopoly power but only among one class of travelers — the business travelers who either a) belong to the frequent-traveler program and are looking to accumulate points or b) want to be located right next to the office they’ll be doing business with. Vacationers, by contrast, are more likely to shop around for a bargain. The goal, then, is to charge the business travelers more than the vacationers. One way to do this is to charge a high price for a service that business travelers are more likely to use. I.e., the wireless.

I don’t know whether this is right, but it’s the best I can come up with on short notice and I like it. Unfortunately (speaking here as a textbook writer) I don’t think it’s going to be a timely example very long, because we’ll soon all be using our phones for wireless and the hotels won’t be able to charge for it, just as they can no longer charge us for phone calls.

On another note — sorry for the extended absence. I’m very busy on what I think is a pretty exciting (and semi-secret) project. But I’m hoping to pop in here a little more frequently from now on.

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13 Responses to “The High Price Of Wi-Fi”


  1. 1 1 Hermes

    I think it might also be related to pay-per-view pornography on the Television in the room. If there is no-cost internet, the hotel loses revenue from pay-per-view pornography, without recouping that cost through internet fees.

  2. 2 2 cjc

    One exception to the idea that we’ll all be using our phones for WiFi access is that of international travelers. I was in Canada last month, and wound up paying for the hotel’s WiFi because it would have been far, far more expensive to do this through my phone.

    So, I suppose one place where we might see hotel WiFi pricing persist would be in locations that see a lot of international tourists, e.g., Time Square hotels. There may be Starbucks nearby, but such tourists may not be aware of the chain’s WiFi policy, it may not be convenient, and so on. In terms of convenience, the growing popularity of streaming video (e.g., Hulu and Netflix) may lead to more hotel WiFi use, as you don’t want to watch long form video inside a cafe.

  3. 3 3 vic

    I’d have thought wi-fi charges would depend on the existing invoicing system and the mark-up on cost equation as well as the absorption costing model used by the enterprise.
    It would take a high level management decision to over-ride the established way of doing things as the entire issue of absorption costing and mark-up is a contentious one as between profit centers within the business.
    I wonder what people who work in this sector and have experience of how decisions are made have to say about this.

  4. 4 4 Phil Birnbaum

    Maybe, too, business travelers are less price-sensitive because they have expense accounts?

  5. 5 5 Phil Birnbaum

    Oops, I didn’t say that right. What I was thinking was something along the lines of:

    Business travelers with expense accounts are spending someone else’s money. So they won’t worry about the extra $10.

    Management DOES care about the extra $10. But it’s not worth their time to investigate all the possible hotels that could be booked for their employee, to figure out whether a hotel has a WiFi charge or not, and add that to their cost calculation.

    They probably look up a list of hotel prices, and find one that’s close to the destination and a reasonable price. If there are two similar hotels across the street, sure, they might pick the cheaper one, but they’re not going to investigate how all the incidental charges match up.

    And so, it’s not worth it for any one hotel to build the WiFi into their room rate. They’d only lose business, because now the room looks more expensive than the one across the street, even when it’s not.

  6. 6 6 Cos

    I suspect that hotels charge for wireless for a similar reason to why they don’t give you a fridge, and charge for it if you want one. Just as a fridge in your room encourages you not to use the hotel restaurants, it may be that about a decade ago when wireless started becoming common, hotels saw it as something that would pull business away from their “business centers” with the printer and fax machine and computer you could use and pay by the hour for.

    Now, I suspect it’s mainly habit – all the big hotels charge for wireless, and they don’t see a big competitive advantage in not doing so. They’ve all already paid to set up the billing systems, so they may be misled by the sunk cost into trying to extract more money from it. I really don’t think there’s a strong rational reason for them to charge for wireless anymore, but it’s standard practice and bucking standard practice when they’re no strong reason to do *that* is itself risky for whoever makes that decision.

    Note that when it comes to monopoly power, I think a big part of that for hotels is event & convention business. It’s a significant chunk of a hotel’s overall business, and it’s one of the biggest reasons people pick a particular hotel even when others might cost less or have better services.

  7. 7 7 Mark

    Isn’t it the case that both of your answers are correct? Yes, lower-priced hotels face stiffer competition, but that’s also because their customers are more price conscious than customers who tend to frequent higher-priced hotels, as you noted. Therefore, you’re going to see more price discrimination at the higher-priced hotels than at lower-priced hotels, for which you need some market power to carry out. I see your two answers as complementary explanations, not substitutes.

  8. 8 8 Harold

    “I’m very busy on what I think is a pretty exciting (and semi-secret) project.” I imagine you stroking a white cat on your lap as you type this.

    I always thought that people do not always consider all the costs when making the initial descision. Thus the headline cost is crucial when competing on price, such as the motels. This seems to work very well for low-cost airlines. They wish to maintain a very low headline price, and add on lots of extras. They get more business this way than folding in the extras with the price, even though the result may be the same for the customer.

    If this were the case, you would expect the cheap hotels to charge for wireless, as the customers have already made the choice based on headline price and are then trapped. However, this does not seem to be the case. From a comment luxurylatinamerica.com “June [2010] issue of Travel & Leisure says 94% of budget hotel brands offer complimentary in-room internet access. Among luxury chain brands, it’s only 31%.”

    There is a factor that providing internet access is not free, and will be more expensive in old, solidly built luxury hotels. But this cost is only a tiny fraction of the charges made, so can only explain a small amount of the difference.

    Hotels have charged extortionate rates for telephone calls for a long time. The more luxurious the hotel, the more extortionate the telephone charges. The wireless thing seems to be an extention of this.

    So part of it is that they charge because they can. If you pay $300 for a room, then $15 on top is not that great. If you pay $30, then you probably won’t pay $15 for wireless. It is not worth the cheap hotels charging the small cost price, so they offer it as a service at little cost to themselves.

  9. 9 9 Seth

    I’ve seen little consistency on this. I’ve stayed at high-end hotels that don’t charge extra and low-end hotels that do, and vice versa.

    I think it really comes down to management discretion and what they believe.

    I don’t think it’s big enough to be the deciding factor for most customers and the feedback on the wifi isn’t good enough for management to validate their beliefs.

  10. 10 10 Bob Murphy

    Glad to see you are still alive (and blogging). I thought maybe you had a Star Drop accident.

  11. 11 11 David Wallin

    I teach cost accounting. I research in economics. (And, extant cost accounting texts are solid in their economics in general.) When it comes to pricing issues, I am regularly amazed at how cost accounting is misused to justify extant pricing practices. My favorite is to listen to restaurateurs’ argue about allowing corkage or determining wine prices.

  12. 12 12 Al V.

    Hermes has a point. On East 42nd St. in NYC there are two hotels a block apart: the Helmsley and the Hilton East. The Helmsley doesn’t offer PPV movies, and has free WiFi. The Hilton does offer PPV movies, and charges $10 for WiFi.

  13. 13 13 James Lakes

    Poor research.

    First paragraph: “Motel 6, and others of its ilk, tend not to charge for wireless.” is incorrect. Motel 6 among the budget motels is probably the only one that does charge a wifi fee.

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