Salocin

Hotel room prices - misleading the customer...

In booking a hotel room in Philadelphia recently, I realised the extent to which customers are often misled regarding the price they pay for the accommodation they receive.

I was desperately trying to find a hotel room in Philadelphia. I only had 24 hours left before I expected to be checking in, and I was getting very worried that I would have nowhere to stay.

I tried hotwire.com who have a great search engine that allows you to choose what price you want to pay, but they were having terrible problems accepting payment from foreign credit cards.

I called up the Crowne Plaza hotel and asked what their cheapest rate was, and was told that I would have to pay $168 per night. Which is fine if you're the Sultan of Brunei, but not if you're looking to finance an MBA in the near future.

Finally, despairing, I went to Priceline's UK web site and offered £35 (about $52) per night for a room in Central Philadelphia. Priceline's system gave me lots of warnings that the actual normal price for a room there is £162 and that I was very unlikely to get anything for so little, especially since I was asking for a 3-star hotel. I ignored all the warnings and pressed the button.

Less than 2 minutes later, I had a room at the Crowne Plaza. At about one-third of the normal cost.

I understand how this works - they're trying to fill rooms, and if they have spare capacity, it's better for their fixed costs if they get some revenue rather than having rooms staying empty. My point is that surely, if the hotel is very empty - or at least empty enough to sell me a room at 30% the normal price - if might be an idea to sell rooms at a cheaper rate directly as well as through companies like priceline and hotwire. That way they might be able to sell them at $70 or $80 per night by trading on their quality, location and name.

What this means in economic terms is that the true price of a hotel room, given the current level of supply and demand, is closer to $50 than to $168, but the hotel chains leave their prices at $168 because - even though this is not the market clearing price - there are some people who are not price sensitive enough to realise they are paying over the odds.

This leads me to believe that even though the Priceline.com business model probably doesn't work very well from priceline's own perspective, it's a fantastic way of ensuring that hotels, airlines and car rental agencies are subjected to market forces to the same extent as consumers.