Add-on policies under vertical differentiation: Why do luxury hotels charge for internet while economy hotels do not?

摘要

Internet services are provided free in more upscale, mid-priced, economy, and budget hotels in luxury hotels compared to luxury hotels. The same tends to be the pattern in gyms, salons and other basic amenities. Two inconsistent explanations are offered: consumers do not know about the Internet charge before booking a room in luxury hotels and, hence, these hotels charge for Internet service because they can, and the other explanation is that customers of higher-end hotels are much less price sensitive, and thus are willing to pay extra. However, lower-end hotels view a free-Internet policy as a differentiation strategy. The article unifies the because-they-can view of higher-end hotels and the because-they-want-to-differentiate view of lower-end hotels by introducing vertical differentiation. This is presented as a game theoretic framework and provides conditions for the phenomenon. A duopoly model is presented by integrating the key features of second-degree price discrimination and vertical differentiation: a higher quality firm competes with a lower-quality firm, both selling a base good and add-on. The model shows that an add-on plays disparate roles when firms are vertically differentiated. Then the profit implications of the equilibrium policies is presented by comparing them to the results from an extended game that allows the firms to have commitment power is derived. The result showed that although the optional-add-on policy is unilaterally optimal, a prisoner's dilemma emerges in which both firms lose profit in equilibrium. Further the research work extends to explain the case in which consumers do not observe add-on prices, and ask what difference it makes to policies and profits in comparison to the observed-price case. The asymmetric profits between the firms are discussed. (35 refs.)