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 naiveté-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.

A Working paper version is attached for distribution.

Authors: Nico Lacetera (Toronto), Claudio Piga (Genova) and Lorenzo Zirulia (Milan Statale)

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