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Sticky Price for Declining Risk? Business Strategies with “Behavioral” Customers in the Hotel Industry

Author

Listed:
  • Nicola Lacetera
  • Claudio A. Piga
  • Lorenzo Zirulia
Abstract
Using data from about twenty-five million hotel room postings in four countries, we document that rather than decreasing to zero as the likelihood of cancellation declines, the difference between the prices for refundable and non-refundable reservations remains positive at roughly 10% to 15% of the full price. A model where travelers have different willingness to pay and some of them overestimate the probability to cancel their trip explains these price-setting patterns more consistently than alternative interpretations. We denote these business strategies as naiveté-based price discrimination. Our data and theory therefore show that this form of apparent inertial behavior of companies regarding a major strategic variable can be an intentional managerial choice. We demonstrate, finally, that this profit-enhancing commitment to limited flexibility may also benefit customers in some cases, by expanding the reach of the market. Thus, strategies that rely on cognitive biases on the demand side may not necessarily exploit consumers.

Suggested Citation

  • Nicola Lacetera & Claudio A. Piga & Lorenzo Zirulia, 2021. "Sticky Price for Declining Risk? Business Strategies with “Behavioral” Customers in the Hotel Industry," NBER Working Papers 28456, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28456
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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