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

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 naïveté-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.