Why pay more? What "opaque hotel inventory" teaches us about brands and search costs

Since the 1970’s, the neo-liberal economic approach has viewed trademarks primarily through the lens of information. Underlying the value (read— “strength”) of a mark is the notion of search costs. A consumer, in deciding whether to buy a product, will typically seek relevant information about the product. However, because it can be costly and time-consuming to obtain the requisite information, a strong mark provides a short-hand form of information on which the consumer can rely in making his purchasing decision.

One can ask for a watch, the company for which was founded by Hans Wilsdorf and Alfred Davis in London, England in 1905 as Wilsdorf and Davis, engaged in importing Swiss watch movements to England and placing them in high-quality watch cases, which were then sold to jewelers who added their name on the watch dial. In 1919, the company, responding to high import tariffs, moved their operations to Geneva, from where it has turned its watch products into an international status symbol. Or one can ask for a ROLEX watch. The ROLEX mark provides valuable commercial information for the consumer; a description of the company, past and present, less so. All of this is reflected in the price that the company can demand for its perceived luxury product.

“Okay Kat, I get it about a Rolex watch. But what about something less luxurious?” How does the cost differential between “branded” and “unbranded” play out in such a situation? Consider Hotwire, and the opaque travel industry. Wikipedia defines “opaque inventory” as follows:

‘An opaque inventory is the market of selling unsold travel inventory at a discounted price. The inventory is called "opaque" because the specific suppliers (i.e. hotel, airline, etc.) remain hidden until after the purchase has been completed. This is done to prevent sales of unsold inventory from cannibalizing full-price retail sales. …. Hotel discounts of 30-60% are typical, and bargains are stronger at a higher star hotel. While one has control over the dates and times of a travel itinerary, the downside is these purchases are absolutely non-refundable and non-changeable….’

As a business aside, the Wikipedia entry notes that—

“Typically hotel deals are greater than airline discounts on opaque travel sites, namely because airlines have limited seating and also take monetary cuts when publishing discounted fares, whereas a hotel sells to opaque sites to fill empty rooms.”

Consider the industry leader Hotwire, an operating company in the Expedia group. According to a podcast advertisement that this Kat recently heard, Hotwire offers “four- star hotel prices at two- star hotel prices” (on its website, it claims to offer the same for five-star hotels at three-star hotel prices, and so on). As a customer, you are provided the details concerning the hotel location, its amenities, indeed, “everything except its name” (which is probably overstated. as it would likely make it too easy to identify the hotel in question).

In return, you receive a discount up to 60% percent on the hotel price (non-refundable). Only after the transaction will you learn of the name of the hotel. Interestingly, on the Hotwire website, it states that it also provides hotel rooms where the name of the hotel is disclosed in advance, although the price discount in such a circumstance is not indicated.

As compared with the Rolex situation, here, the customer has relevant information about the hotel-- the neighborhood where (more or less) it is located, what the room offers, what are the hotel amenities (at least the more standard ones), and the price being offered (being a “deep discount”). As such, one might ask—what else does the customer want to know? The answer seems to be—the name of the hotel. Indeed, Wikipedia reports that—

"In response to these opaque travel sites, there are also 'decoder' sites that use feedback from recent purchasers to help construct a profile of the opaque travel property."

There does not seem to be any magic formula being used for this decoding, here, although it might help you to identify the hotel being offered, at least in some circumstances.

The story of Hotwire and its opaque hotel inventory, with the substantial price differential embodied in the hotel name and brand, would appear to offer support for the information/search cost approach for understanding the commercial function of trademarks. This Kat, in his more recent wanderings among trademark academics, detects that the information/search cost approach is being increasingly challenged. The pros and cons of this discussion is for another time.

That said, this Kat wonders how many of these search cost skeptics will choose to eschew the opaque hotel inventory option, whether being offered by Hotwire or a competitor, because the name of the hotel is not disclosed? Or are they in the 6% or so of the consumer population for which price, ballasted by the identity of the neighborhood and the amenities, roughly described, is paramount?

By Neil Wilkof

Picture on lower left is by Catmuseum and is licensed under a Creative Commons Attribution-Share Alike 4.0 International License