Last week, I was in line at the front desk of a condo hotel in Naples, Florida at around 9 pm.  My electronic key had discharged and I needed a replacement, i.e. I already had a room.

Unlike me, the guy ahead of me was looking to rent a two bedroom but the clerk said they were all full but she could offer him a couple of one bedrooms.  She has three left.  The guy asked her the rate and she quoted him $269/room.  He said that was too much and she asked him how much he was comfortable with paying.  My guess is that as it was pretty late, it was unlikely that the rooms would be used that night so the clerk was willing to  negotiate.  The guy said he was willing to pay at most $200/room.  The clerk said she had to ask her manager and disappeared into the back room.  She came back with an offer of $239 and the guy said that was too much.  The clerk was unwilling to haggle further and the guy left.

All I wanted was a new key.  I was itching for the guy to leave so I could go to bed and ended up focusing on the discussion as I was hoping it would end quickly.  For an economist, it was pretty fun.

First, who knew you could haggle for hotel room prices this way?  A sign of the recession perhaps.  Second, the “let me take your offer to my manager”, just hearkens to haggling for cars so there is a  nice symmetry with that subculture of bargaining.

Finally, we see how delegation can help in certain situations.  Normally, when an agent works for a principal, the principal tries to align incentives so the agent works hard on her behalf.  This results in the optimality of bonuses, commissions and the like where the agent shares the profits of hard work.  But sometimes it is good to commit to turn down business.

A firm with monopoly power wants to maintain a high price.  Once it has made a take or leave it offer to a buyer, if the buyer rejects the offer, the firm has the incentive to cut the price to get business.  Knowing this will happen, high value buyers will reject the initial offer and wait for the lower price. The firm’s market power diminishes as a result of its inability to commit not to lower prices.  This is a hugely simplified version of the Coase conjecture.

But, if instead of a firm/hotel, a manager/clerk makes the offer, there is potentially a different conclusion.  If the clerk does not see a share of the profits generated by the extra sale, the clerk has no incentive to cut the price.  This results in some business being turned away but allows the hotel to maintain some market power.   I guess something like this happened in the hotel bargaining I observed. (Perhaps the clerk is on commission to make a sale and the manager in the back room makes sure the rooms are not then just given way to get the commission?).  If the clerk had the same incentives as the hotel owner, it would be bad for profits as commitment power would evaporate.  Mis-aligning incentives makes more sense.

Or there is a small chance that a person observing the conversation reports it on his blog.  The hotel’s reputation for maintaining high prices goes up in smoke and future sales are made at low prices.  Knowing this, the hotel refuses to accept low offers and keeps its reputation intact.