Sticky Price for Declining Risk? The Case of Cancellation Premia in the Hotel Industry

Abstract

Using data from about seven millions room postings by hotels in France and the UK, we document that, rather than smoothly decreasing to zero, cancellation premia remain positive at roughly 10%to 15% of the full price until two days before the stay. A model where travelers have different willingness to pay and some overestimate the probability to cancel their trip explains this price-setting mode more consistently than alternative interpretations. We denote these strategies as a form of naivete-based price discrimination. We use our model also to identify conditions under which these strategies are exploitative of certain consumers, or are welfare enhancing instead. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.