Economics 101 points to the interaction of buyers and sellers in free
markets as enabling resources, whether goods or services, to be allocated at optimal prices with changes in the latter reflecting demand and
supply changes. However, pricing that follows that precept also serve as a signal to customers. It is a signal that is a key element of the competitive marketplace as they are indicative of the "value" of the underlying product or service.
So how does a game changing (devastating is probably more appropriate) price signaling mechanism as Hotel Tonight affect the market place for consumers and seller? In the short term it is inarguably a good for the consumer. But for hoteliers, despite the self-serving statement of Hotel Tonight's CEO about it being "a windfall for hotels", it is undeniably a net negative both in the short and long term.
In the last couple of weeks, a generally busy period in New York City, reputed hotels were offering same day discounts in the 30 to 75% range. Examples of listings below the rack rate of the day include the Bryant Park Hotel and the Hotel Elysee at $225 and the City Club Hotel at $255. It would surely be a stretch to make the case that these high-end hostelries were trying to garner marginal revenue that equals marginal cost from the trough bottom prices on the iPhone app given their high operating costs.
Retailers are known for pushing "loss leaders" when they offer steep discounts on some items, usually below cost, to attract new customers in the hope they buy other items in the store that are not discounted as much. But for hoteliers, discounting rooms which is their principal product/service, does not open an analagous opportunity for similar tangential gains that they can look to reap from the strategy. Not only do such eviscerating discounts generate little or no brand loyalty there is a clear inference that the discounted price is probably a price at which the rooms should be priced on a regular basis and one in which the hotel is making money.
Instead of a pell-mell rush down discount alley perhaps hoteliers could try taking a leaf out of the book of the sellers of a historic townhouse on Manhattan's East Side that hit the market at $28million; when it did not sell they priced it at $35million.