Resort Fees Must Be Regulated, a Game Theory Argument
Resort fees are in the news again, as Congress looks to apply pressure on hotel companies to stop the growing trend. Pressure alone won’t force a change, though. Resort fees must be regulated to prohibit the practice.
Nobody likes resort fees, even many hotel executives, including myself.
Hotels attempt to show how they’re providing value with the additional fee, but consumers still feel like you’re hiding the ball. People don’t like being nickel and dimed or feel like they signed up for something different than they received.
Still, there’s no way to eliminate these fees without regulation.
Buy Why?
Enter game theory…
The resort fee issue is a classic Prisoner’s Dilemma game from your introductory microeconomics class.
First, the set up.
You have two hotels (or hotel companies, like Marriott and Hilton) that have options to cooperate in eliminating resort fees or defect and continue the status quo. Their collective benefit is greater if they cooperate vs. the status quo, but one is worse off for cooperating if the other defects (see figure 1).
As you can see, collectively, guests spend $260 vs. $220 between the two hotels, thus providing an additional $20 to each hotel.
Let’s walk through the hotels’ decisions.
First, the hotels compare the results of cooperation (figure 2). Clearly, it’s more beneficial to defect so that is the preferred choice.
Next, the hotels compare the results of defection (figure 3). Again, both defecting is preferred to one cooperating, while the other defects.
As you can tell, defect is the natural, stable solution for this game. Adding daily iterations with many more players makes this solution even more likely. This called the Nash Equilibrium (figure 4).
The Nash Equilibrium is the stable state of a game like this, where no participant can gain by unilaterally changing their strategy. Regulation is the only way to change the payoffs such that “Defect” becomes more costly than beneficial.
This is clearly and oversimplification of the real issue. Still, anyone who wants to make a change in the hotel industry (or others with a similar issue) should understand this important game.
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John Wijtenburg is a hotel investor and operates Hotel Investor Toolbox, a website to help investors build and improve their hospitality business. He specializes in acquisitions support, capital advisory, and asset management. This post reflects the views of the author and does not represent the views of any clients or employers.