Why don't luxury hotels provide "free" Internet

The Middle Seat. Pay for Wi-Fi? Only at a Luxury Hotel
by: Scott McCartney
Feb 19, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Pricing

SUMMARY: High-end hotels are fighting hard to be the last place left on Earth where you have to pay for wireless Internet connections.

CLASSROOM APPLICATION: Students can analyze the reason why high-end hotels charge for Wi-Fi connections while lower-end hotels do not. The article draws the analogy between these hotel Wi-Fi charges and airline baggage fees. The related video states, "For the hotels, it lets them advertise a lower rate and then hit you with the upcharge when you get there." The most interesting point in the article for students to analyze: "Wi-Fi has become the most prevalent hotel upcharge, slapped onto bills where business travelers know their companies will pay and affluent leisure travelers are less price sensitive.... They charge at premium properties but not at budget inns because price-sensitive chains have made free Wi-Fi a perk to attract customers, and all want to stay competitive."

QUESTIONS: 
1. (Advanced) What is the relationship between the price elasticity of demand for a hotel and whether it charges for Wi-Fi?

2. (Advanced) Why are businesses willing to pay Wi-Fi upcharges while price-sensitive pleasure travelers are not?

3. (Advanced) What is "add-on pricing"? Is an add-on price posted like a hotel rate is posted? Is Wi-Fi upcharge an example of add-on pricing?

4. (Introductory) Is free Wi-Fi at high-end hotels an effective loyalty inducement?

Why drives decisions about health care?

Hospital Discharges Rise at Lucrative Times
by: Christopher Weaver, Anna Wilde Mathews, and Tom McGinty
Feb 18, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Health Economics

SUMMARY: Many long-term-hospital companies discharge a disproportionate share of Medicare patients during the few days when hospitals stand to make the most, an analysis of claims found.

CLASSROOM APPLICATION: Students can evaluate the effect of Medicare payment rules on hospital discharge decisions. Instructors can present the Medicare-hospital relationship as a principal-agent problem with hidden information (in which the hospitals have private information about the health status of patients).

QUESTIONS: 
1. (Introductory) "Select said in a written statement that its long-term hospitals discharge patients 'based on their medical condition and not on the Medicare reimbursement system' and 'do not manipulate discharge timing based on financial considerations.' The company said bonuses are based on 'overall financial performance,' among other factors, and not the share of patients discharged near the threshold." Is overall financial performance affected by the timing of patient discharges? If so, do bonus-earning employees have a financial incentive in timing discharges?

2. (Advanced) Should Medicare use a step function (i.e., payment thresholds) to determine hospital reimbursements?

3. (Advanced) "If a patient was two days from the threshold, 'you were incentivized to see if you couldn't find a reason to keep them for two more days,' says Mr. Marquardt, who left the company in December to work as a consultant. Mr. Marquardt says he didn't believe the efforts caused harm. 'You might play the game a bit, but you would never put a patient at risk,' he says. Is this game a game in the game-theoretic sense? If so, who are the players? What actions are available to them and what is the sequence of play? What information does each player have?

4. (Advanced) For-profit companies such as Kindred and Select were more likely to discharge patients during the most-lucrative window than nonprofit competitors, the Journal's analysis shows. Why are for-profit hospitals more likely to discharge patients during the most-lucrative window?

5. (Advanced) What is the principal-agent problem with hidden information? Is the case described in the article one of these problems?

Wal-Mart's pay scheme

This article in Reuters may be of interest, especially to the group that analysed Wal-Mart's pay scheme. It reports that Wal-Mart is increasing the lowest wage paid by the firm to $9 and then to $10. Here are some interesting questions to answer.

1. Why is Wal-Mart increasing wages at this time?
2. What benefits does Wal-Mart anticipate as a result of the increase?
3. How will the increase affect profitability in the short run? In the long run?

Here is the WSJ's article.

What is the optimal margin when demand is inelastic?

The formula for the optimal margin of price over marginal cost is 1 / |e|, where e is the price elasticity of demand. This formula does not work when demand is |e| > 1. When |e| > 1 the demand is inelastic. The firm can always increase profit by increasing price when demand is inelastic and marginal cost is non-negative; the optimal price is infinitely high if elasticity and marginal cost are both constant.