Chapter 59 Question 052

Why do cheap flights charge for meals (luxury flights are usually free), while luxury hotels charge for Internet access (cheap hotels are often free)? (Dai Jia) In the past, all airlines would provide free in-flight meals, but now only high-priced flights (such as Singapore Airlines, etc.) do so.Passengers on United Airlines or American Airlines flights either bring their own food on board or pay for a boxed meal.In contrast, luxury hotels like the Four Seasons Hotel generally charge ten dollars or more per day for Internet access in guest rooms, while cheap hotels like the Hampton Hotel generally provide such services for free.Why this difference?

In a perfectly competitive market, there is no free lunch principle that customers who choose extra services should pay extra.The logic here is this: If a company offers a free extra service and tries to include it in the price of the base product, then competing sellers can lure in unwanted sellers by lowering the price of the base product and charging for the extra service separately. Customers who use additional services. Of course, a perfectly competitive market does not exist in real life.But the market for seats on cheap flights is closer to perfect competition than the market for seats on luxury flights; there are fewer of them and more specialized services are offered.For similar reasons, the market for cheap guest rooms is closer to a perfectly competitive market than the market for rooms in luxury hotels.These observations seem to suggest that budget airlines and cheap flights are more likely to charge extras separately.So there is no free lunch principle to explain why cheap flights charge for meals while luxury flights include meals in their base fare.It would also explain why most flights used to offer free meals.Because the entire air travel market used to be a luxury market until the last few years.But at first glance, the pricing models we've seen for hotel internet services don't seem to fit the no-free-lunch principle.

Here is a plausible explanation: the root of this difference lies in the difference in the cost structure of the two services.The cost of serving a meal generally grows with the number of meals served.But the cost of providing Internet access services is largely fixed.Once a hotel has installed a wireless network, the marginal cost of allowing other guests to access the Internet is essentially zero. The no free lunch principle tells us that the more competitive a market for a good or service is, the closer its price will be to marginal cost.Since the budget hotel room market is more competitive than the luxury hotel room market, we can infer that the budget hotel room rate is more likely to include Internet access fees.Cheap hotels may be more willing to charge extra for Internet access, but since the marginal cost of providing access is zero, there will certainly be some inns that advertise free Internet access as a gimmick.Price-conscious travelers may be drawn to the service, forcing other budget airlines to follow suit.There is no similar pressure on low-cost airlines to offer free meals because the marginal cost of each meal is always increasing.

Luxury hotels charge for Internet access because their customers are either wealthy or travel reimbursements, and therefore not price sensitive.However, if enough guests start complaining about the practice, then, since the marginal cost of providing Internet access is zero, presumably some luxury hotels will include it in their rates.If that happens, other luxury hotels will soon be under pressure to follow suit. In the next two examples, at times, sellers appear to have the right to charge higher prices, or to charge penalties for cancellations, when, strategically, they do not.