Wi-Fi and Consumer Surplus

Despite the odd scare story (the BBC is not blameless) Wi-fi is taking off. There are around 11,477 wi-fi hotspots in the UK and major service providers include the Cloud, BT, and T-Mobile.

How can some hotels continue to get away with charging up to £19.99 per day for wi-fi access and some coffee stores still charge £6 an hour for wi-fi access whilst others (including McDonald’s) are now rolling out wi-fi services for free? There is plenty of interesting economics in looking at the different charges made by different wi-fi service providers often within just a few yards of each other.

For hotels, wi-fi and charges for movies are just two of the ways that they can extract the consumer surplus of residents and turn it into producer surplus. It is often the case that the hotel will have heavily discounted the cost of a room to maximise the number of guests relative to capacity. Once we are comfortably installed in our rooms and we want to connect, the disincentive in terms of time, money and hassle to head out of the hotel in search of a suitable location is pretty strong. The same principle applies also to the cost of the contents of the mini-bar. Opening the mini bar and consuming the contents, clicking the yes button on the remote that charges wi-fi access to our room bill - both are acts that reveal much about our preferences and, ultimately, about our willingness to pay for these services.

The Scotsman had an interesting feature on the cost of wi-fi a few days ago (available here)

‘National Express East Coast offers free access to all passengers on its trains travelling between Scotland and London, while the Beanscene coffee shop chain, Apex Hotels and Citylink coaches also provide a complimentary service. McDonald’s, which has embraced healthy foods and high quality coffee to attract a more affluent crowd, will offer free wi-fi at all 91 of its stores in Scotland from April, with 74 already providing the service. It is aimed at a broad range of customers, from business people making a pit stop to check e-mails in between meetings to those looking for a leisurely break at the weekend to download music.’

All power to McDonald’s! Jim writes about the ‘new entrepreneurial bedouin’ in his business studies blog today. And I must admit that I am far more likely to go into a coffee store or stay at a hotel that has free (or at the very least good value) wi-fi access. Perhaps I am being utterly selfish in taking up space (perhaps for an hour or two) that makes the store more congested and deprives the coffee house of revenue from the freer flow of customers? But what are coffee stores for? To connect with real people and those online and enjoy a comforting drink in relaxes surroundings.

Within half a mile of my house there are 120 wi-fi hotspots! The market looks pretty competitive in terms of service providers although many are linked into the Cloud network. That said, once you develop a coffee store of choice (in my case, caffe nero) the price elasticity of demand for wireless services declines. I dont want the inconvenience of having to remember another user password and login name for each of the wi-fi service providers. I want to be able to sit down, connect and start work immediately and not have to fish out my credit card details for another ISP.

Liberty-izone Ltd
T-Mobile (UK)
iPass (tmobile)
Divine Management WiFi Zone - The Cloud
The Cloud WiFi Zone - The Cloud
Independent Provider Virtually Free
Trustive surfandsip
BT Openzone WiFi Zone
Divine Management WiFi Zone - The Cloud
Nintendo Wi-Fi Zone WiFi Zone - The Cloud
O2 WiFi Zone - The Cloud
Skype WiFi Zone - The Cloud
Sprint WiFi Zone - The Cloud
Vonage WiFi Zone - The Cloud
credEcard WiFi Zone - The Cloud
BT Openzone