Rafi Mohammed

Want to Go to DC for the Inauguration, Be Prepared to Pay $1,000 a Night with a 4 Night Minimum

Posted on January 20th, 2009 (4 Comments)

The hot ticket these days is to be in Washington DC for the Presidential Inauguration. Millions of people plan to participate in this historic event. Of course, what I find fascinating about this celebration is the prices that hotels are charging to stay in the District of Columbia and its surrounding areas. News reports claim the going rate to stay in a middle of the road hotel is $1,000 per night with a four night minimum. The interesting part of this pricing strategy is the “four night minimum” requirement. Why not charge $2,000 on the most “in demand” nights and a lower price for the other nights that build up to the swearing in?

When I was a graduate student, one of my favorite economics classes was Price Theory (…no big surprise, I know) that was taught by Bob Frank. In addition to being a well respected academic (authoring several books including co-authoring a macroeconomics text book with Fed Chief Ben Bernake), Bob is considered a pioneer in translating and applying economic theory to everyday real life situations.

As part of his price theory course, he asked his students to write a paper that poses a puzzling question and then answer it with economic rationale. I recall Bob mentioning that one of the most interesting student papers asked and answered the following question: “at graduation time, why do hotels keep their prices relatively reasonable and impose a 4 night minimum?” A little background: Cornell is remotely situated in upstate Ithaca, New York. Every May, 5,000 – 6,000 students graduate and there can’t be more than 600 hotel rooms in the local area. Again, why not just charge exorbitant rates on the key Friday and Saturday nights that everyone wants and forego the four night minimum?

The student’s answer was intriguing: s/he felt that people in the hospitality industry are good natured and generous people. As a result, they can not in good conscience charge the “usurious” market rates for peak demand nights. So as an alternative, local hotels and Bed & Breakfast inns use a booking minimum to psychologically keep the rate low – even though many customers purchase the four nights but only use two.

I think this is a great explanation for this minimum night phenomena. In my line of work, I stay at many hotels around the world. If there is one characteristic that is consistent amongst the people I’ve met who work at hotels is how nice they are and their genuine willingness to go out of their way to make their guests’ stays great. I believe that working at a hotel attracts generous and hospitable employees.

So what do you think? Does this hospitality reasoning explains the multi-night minimum or do you have an alternative explanation? I’d love to hear your thoughts.

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Readers' Comments on This Blog Entry

From Steve on January 20th, 2009
Seriously, i agree with the students answer. I think the Four Season's in DC was asking for around $100,000 for 4 nights including another stay somewhere else plus tickets. Tim McGraw and Faith Hill ended up paying about $30,000@ for 2 nghts. Google Four Seasons DC, Tim Mc Graw Faith Hill, and i bet it comes up.
From Mike on January 20th, 2009
I live in Denver and when the DNC was here the prices were high but they were not doing the 4 day minimum. The 4 night minimum is also a loophole because there is a highest posted "rack" rate that the hotel can charge. In the eyes of the hotel it is not as "bad" when they charge 4 nights versus 1 really high rate and it keeps occupancy higher.
From Steve on January 20th, 2009
I work directly in the hotel and B&B industry here in Washington, and specifically work to set the rates for several lodging establishments. In the case of this Inauguration, most events were spread out over 3 days, beginning on the Sunday before Tuesdays Inauguration. Setting a 4 night minimum stay was matched most of the festivities and was therefore what a significant number of persons coming to town were looking for. The minimum stay of 4 nights maximizes income, when it is expected that most guests are looking for that anyway. The reasoning of charging premium prices for what might be considered the desired nights just does not make sense. If I was charging $400 per night with a 4 night stay, should I have then priced the nights at $1600 (why would I set a 2 night minimum stay if 4 was inappropriate). I submit that minimum stays are not about making people stay longer than they want, but more of what the hotel or innkeeper expects the majority or at least many people would be looking to stay anyway. When a property has a limited number of rooms, especially true for many B&B's accepting 1 or 2 night stays when the majority of persons would be looking for longer stays simply misses income opportunity. Ultimately, rates and minimum stays work only at what the market will bear. It is my experience that the Hotel managers and B&B owners are pretty good at figuring that out. After all, remember Inaugurations, Graduations, and annual events create patterns which can be documented and then followed.
From Seb on January 21st, 2009
Interesting answer, I think there might be another explaination as well. If there is a price limit where people find substitutes for the stay and an excess demand so that there some demand for 4 night stays it will be more successful to put a 4 night stay minimum to yield in the guests that are looking for longer stays than to price up the high demand nights. It all has to do with what the limit in price is and what the demand is for extended stays. That said I do agree that there is some psychological restraint in charging too high prices, but there usually are psychological restraints to pay high prices as well...