Wednesday, May 7, 2014

Inferior Internet Goods

So, I'm writing this on.............

 a hotel network connection which is very,.........

very slow, at 768 kbps but it feels........

even slower. I can't even use gmail, or.....

Blogger with full functionality.

Of course, for a paltry fee of $12.95 I can have access to full 5mbps internet speed which rivals my home connection. I doubt it costs the hotel much, if anything, to allow me this access.

Part of the story is probably price discrimination, but done in a somewhat unique way - giving an inferior good to people who won't pay the extra.

The hotel wins in two ways. When they're advertising a price plus free internet I mentally subtract the $10 (or so) it would cost me to get acccess somewhere else, so I'm more likely to book there. Second, people who don't care about what it costs will happily pay the extra $12.95 regardless, and the hotel pulls in a bit more cash. Meanwhile, people who won't pay are unaffected, and just tolerate the hamster-in-a-wheel internet speed.

What's the difference between this business model and charging a flat fee to get on the internet, period? Better advertising, for one. There is also this interesting paper by Gabaix and Laibson which argues that non-transparent hotel fees are an industry equilibrium because sophisticated customers will take advantage of transparent hotels and mentally account for the additional costs of lodgings that obfuscate their "incidental" prices.

In that light, count me among the unsophisticated.

Not that I'm complaining. As a grad student with low income, I'm the perfect candidate for inferior goods. And I still managed to post this blog entry from slow internet. Plus, I didn't have to listen to the sounds a robot orgy from my modem before logging on, like I did as a teenager hoping for 56 kbps through the phone line. If websites still assumed visitors were on a glacially slow connection, 768k would be a bandwidth hog's heaven.


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