The Exorbitant Cost of WiFi on Flights, and Sometimes in Hotels

[DonRocks]

Not really.  It actually is the passengers' fault, in that they look at only one thing when booking an airline seat, and that is the cheapest fare.

I would say this is the latest example of the airline industry's contempt for their customers:

<--- Needless to say, I refused to pay it.

But there's this which gives me a glimmer of hope:

"American Airlines Sues To Exit GoGo's Inflight Wi-Fi" by Mike Snider on usatoday.com

And I acknowledge that GoGo is a private company, which may be guilty of unbridled greed.

I wonder how many hotels realize they lose my business 100% of the time when they charge for WiFi.

[johnb]

And I acknowledge that GoGo is a private company, which may be guilty of unbridled greed.

I wonder how many hotels realize they lose my business 100% of the time when they charge for WiFi.

Keep in mind that that's how the system works.  The whole idea is that private companies are expected to exhibit unbridled greed.  But at the same time, competition from other greedy private companies causes {is supposed to cause} the market price to drop to the correct level, reflecting the actual underlying costs.  That is the genius of the free-market system.  It neither does nor needs to rely on the generosity of anyone, which wouldn't work because there are always those who will be greedy.  Rather it relies on the famous "invisible hand" of Adam Smith, which drives down the price to the right level whether greedy market participants would choose to charge that price of not.

But of course, for the above to work, there must be others in the market, i.e. competition.  Otherwise you have a monopoly.  What you experienced on that aircraft was a micro-monopoly, which allows them to charge a ridiculous price.  It's a flaw in the system, but it won't last forever because eventually another airline will offer something better and enough customers like you who have become aware of it will choose that airline instead -- that is exactly what is motivating American Airlines to get rid of GoGo and install a better and cheaper system, a pre-emptive move so they don't lose too many customers when Delta or whomever comes up with a better deal.

As to hotels, the ones that charge for WiFi certainly realize that they are "losing" your business.  But the truth is they don't give a s***.   Notice that it's mostly the expensive Ritz/JW type hotels that charge for WiFi, while the downscale Court/Suite types mostly give it away for free. Ask yourself why that is.  Customers like you and I are price sensitive, otherwise known as cheap; we book using discount on-line services, or like Joe H call direct and negotiate, but either way we don't stay in the Ritz in the first place--we go downscale (well, except maybe for Joe).  The Ritz's customer base is rich business travelers who just pay the bill with their corporate Amex card and think no more about it.  The Ritz can charge them for WiFi because, well, they don't really care what they pay -- most of them probably don't even look at the bill, because that would be unseemly after all.  The Ritz knows you aren't going to stay there, so they haven't lost your business by not giving you free WiFi, you cheap bastard.  Your threat to not stay there is hollow.  So just go over to the Court/Suite, sonny boy, and don't soil our nice lobby rug.  Oh, and don't forget the bug spray!

[DaveO]

Keep in mind that that's how the system works.  The whole idea is that private companies are expected to exhibit unbridled greed.  But at the same time, competition from other greedy private companies causes {is supposed to cause} the market price to drop to the correct level, reflecting the actual underlying costs.  That is the genius of the free-market system.  It neither does nor needs to rely on the generosity of anyone, which wouldn't work because there are always those who will be greedy.  Rather it relies on the famous "invisible hand" of Adam Smith, which drives down the price to the right level whether greedy market participants would choose to charge that price of not.

But of course, for the above to work, there must be others in the market, i.e. competition.  Otherwise you have a monopoly.  What you experienced on that aircraft was a micro-monopoly, which allows them to charge a ridiculous price.  It's a flaw in the system, but it won't last forever because eventually another airline will offer something better and enough customers like you who have become aware of it will choose that airline instead -- that is exactly what is motivating American Airlines to get rid of GoGo and install a better and cheaper system, a pre-emptive move so they don't lose too many customers when Delta or whomever comes up with a better deal.

As to hotels, the ones that charge for WiFi certainly realize that they are "losing" your business.  But the truth is they don't give a s***.   Notice that it's mostly the expensive Ritz/JW type hotels that charge for WiFi, while the downscale Court/Suite types mostly give it away for free. Ask yourself why that is.  Customers like you and I are price sensitive, otherwise known as cheap; we book using discount on-line services, or like Joe H call direct and negotiate, but either way we don't stay in the Ritz in the first place--we go downscale (well, except maybe for Joe).  The Ritz's customer base is rich business travelers who just pay the bill with their corporate Amex card and think no more about it.  The Ritz can charge them for WiFi because, well, they don't really care what they pay -- most of them probably don't even look at the bill, because that would be unseemly after all.  The Ritz knows you aren't going to stay there, so they haven't lost your business by not giving you free WiFi, you cheap bastard.  Your threat to not stay there is hollow.  So just go over to the Court/Suite, sonny boy, and don't soil our nice lobby rug.  Oh, and don't forget the bug spray!

And another explanatory, clever, thoughtful explanation courtesy of JohnB.  Kudo's.  Geez, I love these type posts you've been sharing.  Thank you.

As to the above:  First paragraph:  I worked as a commercial real estate (RE) agent/broker for 2 decades.  Businesses like the airlines, certainly commercial RE and residential RE, and endless others function and price things relative to the market.  Competition comes in...prices drop.  No competition prices go up.  There are micro markets and macro markets and usually relatively imperfect markets, etc.  Great description.

Second paragraph:  Proceeds from the initial paragraph.  If the first or earliest providers of a service price it at out of the world "monopolistic" prices other competitors will enter the market and undercut their prices.  Always happens.....except as we've seen recently wherein some "greedy jerk" effects the purchase of a drug company so he could raise the price of a necessary drug by a factor of 5,000%   There must be no competitors for that drug/medication (though I bet businesses are working on it now)

Third paragraph:   Some industries and businesses are so segmented.  Its both stunning and revealing.  Heck, restaurants are like that also; there is an entire subset of restaurants in virtually every city of substance that works to the corporate credit card marketplace.  Its a pretty big marketplace. In big destination cities such as DC, NYC, Paris, LA, Tokyo etc etc there are lots of them.  In smaller destination markets there are fewer of them.   BTW:   Hotels are really subject to "market".  When market conditions change .....watch their pricing and deals change dramatically.  ....and speaking of hotel pricing and "negotiating hotel prices" if the Ritz Tysons has 5-10-25 unsold rooms tonight...you might call them up towards the end of the day and get a room for $30-40-50 for the night.  If they don't sell those rooms tonight...they'll never recover that lost income...$30-40-50 is better than nothing.  They might, they might not...but its worth a try.

In any case your various comments on travel and some other topics are evidence of experience, deep thought, research and depth.  I for one wish to thank you for them.

[mr food]

Many of the hotel loyalty programs such as Marriott rewards and IHG now offer free wifi with membership and, if you have a smart phone, you can use the hot spot feature so not a deal breaker for moi. I generally don't bother with airplane wif as it's slow but I sense speeds will improve.

[DonRocks]

Keep in mind that that's how the system works.  The whole idea is that private companies are expected to exhibit unbridled greed.  But at the same time, competition from other greedy private companies causes {is supposed to cause} the market price to drop to the correct level, reflecting the actual underlying costs.  That is the genius of the free-market system.  It neither does nor needs to rely on the generosity of anyone, which wouldn't work because there are always those who will be greedy.  Rather it relies on the famous "invisible hand" of Adam Smith, which drives down the price to the right level whether greedy market participants would choose to charge that price of not.

But of course, for the above to work, there must be others in the market, i.e. competition.  Otherwise you have a monopoly.  What you experienced on that aircraft was a micro-monopoly, which allows them to charge a ridiculous price.  It's a flaw in the system, but it won't last forever because eventually another airline will offer something better and enough customers like you who have become aware of it will choose that airline instead -- that is exactly what is motivating American Airlines to get rid of GoGo and install a better and cheaper system, a pre-emptive move so they don't lose too many customers when Delta or whomever comes up with a better deal.

As to hotels, the ones that charge for WiFi certainly realize that they are "losing" your business.  But the truth is they don't give a s***.   Notice that it's mostly the expensive Ritz/JW type hotels that charge for WiFi, while the downscale Court/Suite types mostly give it away for free. Ask yourself why that is.  Customers like you and I are price sensitive, otherwise known as cheap; we book using discount on-line services, or like Joe H call direct and negotiate, but either way we don't stay in the Ritz in the first place--we go downscale (well, except maybe for Joe).  The Ritz's customer base is rich business travelers who just pay the bill with their corporate Amex card and think no more about it.  The Ritz can charge them for WiFi because, well, they don't really care what they pay -- most of them probably don't even look at the bill, because that would be unseemly after all.  The Ritz knows you aren't going to stay there, so they haven't lost your business by not giving you free WiFi, you cheap bastard.  Your threat to not stay there is hollow.  So just go over to the Court/Suite, sonny boy, and don't soil our nice lobby rug.  Oh, and don't forget the bug spray!

This is a general lecture on free-market capitalism. Throughout my reading, I kept nodding my head, and saying yes, and? ... yes, and? ... and I kept waiting for the payoff, but in this particular case I didn't get one. I actually agree with some of the general concepts of everything you say here, at least in theory, but in this case, I didn't learn anything. (I have near-total respect for what you say, John; it's just that this one didn't grab me.)

"The Invisible Hand" only works if there's a high-enough sample size, and there never is, at least not one large enough for a perfect market, unless you're talking  *macro-macro* economics over the *long-long* term, and even then there are plenty of cases where it doesn't work. Look at the current state of things - if it works, then why isn't it working? I know, I know, because of government intervention - I shouldn't have said that.

If you want to talk about The Invisible Hand as it relates to The Heisenberg Uncertainty Principle, then I'll buy it, except in the cases when it doesn't work even then.

I'm out of town, and don't have time to get into an in-depth discussion of this, but there's plenty of reading material on the internet if you Google 'The Invisible Hand flaws,' for example:

"There Is No Invisible Hand" by Jonathan Schlefer on hpr.org

People have been debating this for a long time, and they'll be debating it for a lot longer still.

And while GoGo currently has a something of a mini-monopoly, I'd say the airplanes themselves are something of an oligopoly, which is much more damaging, as the barriers to market entry are so massive that they make Elon Musk shiver.

My post started out being a cautionary avertissement about the exorbitant cost of WiFi on American Airlines, and nothing more. I actually threw that final line in about hotels (and appended it onto the title) as an afterthought, right before I was about to click on "Add Post," giving hotels more importance than I intended them to have - very poor writing on my part.

Let me emphasize: your post - as usual - was intelligent, cogent, and interesting; it's just "bigger" than what I was getting at. I'd love to discuss it (The Invisible Hand, and all its ramifications) with you and everyone else, but I just can't do it today. By all means, start without me (I may move a general discussion to its own thread in the History Forum).

(I have to throw this in: It isn't always the luxury hotels that tack on fees - I was thisclose to booking a great fare at a lowbrow "resort" yesterday, and right before I finalized the transaction, I noticed a $25 daily "resort fee," and backed out of the transaction - this hotel was in the low $100s to begin with.)

[johnb]

"The Invisible Hand" only works if there's a high-enough sample size, and there never is, at least not one large enough for a perfect market,

 very poor writing on my part.

(I have to throw this in: It isn't always the luxury hotels that tack on fees - I was thisclose to booking a great fare at a lowbrow "resort" yesterday, and right before I finalized the transaction, I noticed a $25 daily "resort fee," and backed out of the transaction - this hotel was in the low $100s to begin with.)

Well, as someone who has spent his entire life practicing economics (starting with three degrees more-or-less in the subject), I'm well aware of the shortcomings of the "invisible hand."  But you're considerably overstating them. Briefly, while it's true that you can never have perfect competition in the real world, you don't need to have perfection.  Economists make the important distinction between perfect and workable competition. Workable competition means that you have enough competitors to cause them to bid prices down to a reasonable level consonant with the true underlying cost of providing whatever it is.  It all depends, but typically if you have 4 to 5 or so competitors in a particular market that will do the job so long as they can't collude, which is where anti-trust comes in.

Your writing is never poor.

So-called resort fees are a different animal and appear in a different setting.  Apparently just about every so-called resort throws them in -- maybe in this case it's the upscale ones who don't -- I don't know.  What they amount to is a way to advertise a lower price than the actual price.  Somebody started doing it so competitive pressure (there we have competition again) forced "everybody" to do it. Again it's an appeal to those who are price-sensitive (cheap), but in this case also less careful, so in that way perhaps it is consistent with the WiFi fees above.  But if you go to such a resort there is no option to avoid them as is the case with WiFi fees, nor should you worry about it -- just add them to the advertised price to get the real price and then decide if you want to take the deal.

[DaveO]

Well, as someone who has spent his entire life practicing economics (starting with three degrees more-or-less in the subject), I'm well aware of the shortcomings of the "invisible hand."  But you're considerably overstating them. Briefly, while it's true that you can never have perfect competition in the real world, you don't need to have perfection.  Economists make the important distinction between perfect and workable competition. Workable competition means that you have enough competitors to cause them to bid prices down to a reasonable level consonant with the true underlying cost of providing whatever it is.  It all depends, but typically if you have 4 to 5 or so competitors in a particular market that will do the job so long as they can't collude, which is where anti-trust comes in.

Your writing is never poor.

So-called resort fees are a different animal and appear in a different setting.  Apparently just about every so-called resort throws them in -- maybe in this case it's the upscale ones who don't -- I don't know.  What they amount to is a way to advertise a lower price than the actual price.  Somebody started doing it so competitive pressure (there we have competition again) forced "everybody" to do it. Again it's an appeal to those who are price-sensitive (cheap), but in this case also less careful, so in that way perhaps it is consistent with the WiFi fees above.  But if you go to such a resort there is no option to avoid them as is the case with WiFi fees, nor should you worry about it -- just add them to the advertised price to get the real price and then decide if you want to take the deal.

Well as one that doesn't have a degree in economics but took several classes in economics (that I enjoyed) but then worked in "markets" for several decades....I absolutely returned to what I had learned and applied it all the time; on macro perspectives  and on micro perspectives  (in my case the supply and demand and subsequent pricing of sub markets).

Ahhh....the "invisible hand"    That is an obscure reference.  I've looked at the "market" or pricing as a function of the "invisible hand" or alternatively all the aggregate buying and supplying decisions of the parties in a market.  The market or pricing, as I understood it and practiced it is a function of the aggregate of those many actions and decisions all made by individuals or businesses.

From a practicing perspective I see it there all the time.  On the other hand there are NO perfect markets....but prices arise, many individual decisions are made and pricing gets "some kind of definition".

And those luxury resort "add ons".   All businesses do that...all kinds of industries.  From the buyer side it certainly complicates things, decisions, etc.  Its not just the US, I've seen that kind of pricing around the world.  I've always found it annoying and its often struck me as deceptive...but it is pervasive, for god's sakes.  Geez.  Think buying cars.  (wasn't Saturn pricing a "marketing effort" to address that phenomena??)

[johnb]

A little new information pertinent to this thread.

"Looking To The Sky To Speed Up In-Flight WiFi" on travelskills.com

[johnb]

Here's something that showed up in WashPo today on the topic of resort fees:

"Find a Hotel Rate That Seems Too Good To Be True? Look For The 'Resort Fee'" by Christopher Elliott on washingtonpost.com