Exhausted and dehydrated, the tourist arrives to his hotel room. He looks around and sees the classic minibar waiting. He walks across the room hesitantly, only to confirm as he opens it that the prices are exorbitant, and he finds himself thinking yet another time “Two euros?! I can literally cross the street and find a water bottle for fifty cents! Who buys this stuff?” The answer to this might be the naïve consumer, as we will see in this blog.
Hotels compete to offer the lowest possible rates to their consumers. In order to being able to offer the best possible discounts and capture sensitive-price consumers, they have to find other sources of revenue, which take the form of hidden charges or “shrouded fees”. How does that work? Let’s assume the cost of the supplied room is 150€. In addition, let the cost of the minibar be 10€. If the hotel charges 30€ for the minibar, in perfect competition it would have to charge 160-30=130€ for the room (total cost needs to equal total revenue). The hotel room can be priced below marginal cost and the price of the add-on is above marginal cost. Our tourist, being what we will call the sophisticated consumer, will actually reap the benefits of the below marginal cost room fee without paying for any water or peanuts. But that’s not the case of every consumer.
As it is known, in perfect competition market agents are rational and there is perfect information, so firms have no incentive to “hide” prices. However, if there is consumer myopia, firms will try to exploit that. We can find two types of consumers – the sophisticated and the naïve. While the sophisticated consumer is well informed and smart about prices, markets and quality, the naïve consumer is the one that, by buying what’s inside the minibar at the high price, is subsidizing the low-priced room and making the sophisticated consumer better off. Additionally, the naïve consumer doesn’t take the price of the minibar into account when choosing a hotel room, whether the sophisticated consumer looks for the lowest priced room with the most add-ons (not only minibar but dry cleaning, parking services, you name it), that he can gladly substitute away by bringing his own water and snacks to the room.
And so it seems the sophisticated consumer is fine and hotels should be fine as well. In fact, if the number of naïve consumers is sufficiently high, there is an equilibrium. And although we might be tempted to say that naïve consumers would have an incentive to deviate from this situation, this is not necessarily true – if we incorporate elements such as uncertainty about prices outside the hotel, the fact that the minibar products are available at late hours when outside shops might be closed , or even that some minibar supplies would be hard to find outside the hotel, we end up concluding that this consumer can be perfectly rational in his decision. At the end of the day, it’s all about individual preferences.
Inês Gonçalves, 743