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Venturing into Freakonomics 

ARVIND PANAGARIYA

 The recent best seller titled Freakonomics by Steven Levitt, winner of 2003 Clark Medal awarded to the best American economist below forty years, has sparked the interest of economists in providing surprising explanations of the phenomena observed in everyday life.

For example, crime rates in the major US cities fell significantly during the 1990s. Most past analysts had attributed this decline to increased incomes, better employment opportunities, ageing population and improved enforcement.

Levitt comes up with an entirely different and surprising explanation: legalisation of abortion in the US in the mid-1970s. He suggests that unwanted children of poor and single mothers disproportionately turn to a life of crimes. With legalisation, abortion became affordable for these mothers and substantially reduced the birthrate of potential criminals.

This column is about a similar surprising explanation of a relatively recent experience I had during a visit to India. I had come to attend a conference in a metropolitan city. Conference hosts had generously arranged our stay at a top five-star hotel.

 My flight arrived past midnight, as most flights from Europe do. The hotel sent a car and a hospitable driver, who spoke fluent English, to the airport. Upon arrival at the hotel, a young employee, Rekha, greeted me at the entrance. This was new India: efficient and professional.

As we went inside the lobby, Rekha offered me a seat opposite her desk while proceeding with the paper work to check me into the hotel. She informed me of the daily room rate, which happened to be in the neighbourhood of a staggering sum of Rs 13,000.

She also confirmed that I was staying at the hotel for three days and asked if I knew my departure time. I told her that I was taking a local flight early morning of the day of departure and would need to checkout at 4 a.m. She promptly made note of the information.

After more than 24 hours in the air or airport terminals and at 2 o'clock in the morning, I was eager to get a few hours of sleep before starting the day. Therefore, I was simultaneously shocked and outraged when Rekha unexpectedly announced that hotel computers being down, she could not locate a vacant room for me. I would have to wait in the lobby until the computers came back up.

 Crashing of computer networks is a common problem in all organisations. Therefore, it was difficult for me to believe that a top-class hotel would not have a strategy worked out to deal with such a situation.

After all, airline reservations are vastly more complicated and even then flights rarely fail to takeoff when the computers at airports go down. Moreover, keeping track of the rooms that have been recently vacated without the help of computers would seem to be a relatively simple matter.

Guests usually clear their accounts at the checkout desk before they leave and the hotel staff physically checks the rooms as a part of the normal checkout exercise. The staff manning the checkout desk and that maintaining the rooms should readily be able to identify the vacant rooms.

Moreover, it would be bad management in India to have no vacant rooms in the knowledge of the hotel staff since VIPs may arrive anytime and must be accommodated immediately.

 I was additionally upset that my hosts had made the reservation weeks in advance and had paid a huge rent for a room that could not be made available even past midnight.

It was bad enough that given my planned check-in time of 2 a.m. and checkout time of 4 a.m., I was going to occupy the room for only 50 hours and the hosts had to pay for three days. But it now appeared that I will effectively have the room for less than two days and yet the hotel would charge for three days.

Most hotels in the US would take off the charge for at least one day under these circumstances. But Rekha and a hotel manager, who had by now joined the argument, would only offer me profuse apology, juice or coffee and words of sympathy.

Convinced that the hotel could not be without at least one or two vacant rooms whose location it knows, I persisted. I am not sure whether it was the force of my impeccable arguments or the sight of an upset guest about to create a ruckus that finally persuaded the manager to relent.

 He asked me to walk up to the elevators with him and took me to the Club floor. There he opened a club-class room for me for the night. At last, sleep was within sight.

Now the puzzle for the freakonomist: despite several weeks of advance notice, why did the hotel not have a vacant room for me? And if this was an exceptional circumstance, why did it not give me the club-class room right away or take the charge for one night off the bill?

My conjecture - and in the absence of systematic empirical evidence it is just that - is that this incident was not exceptional but part of a systematic profit-maximising strategy. In India, guests from the US and Europe do not begin to arrive at the hotels until around 1 a.m. And the guests who plan to take local flights checkout of the hotels around 4 a.m.

This gives the hotels the opportunity to rent several rooms twice each day: first to the guest who would take early-morning local flights and then to those arriving by international flights. This requires some guests arriving by international flights to wait a few hours in the lobby.

But given the shortage of hotel rooms, most of them are happy to just get a room topped by warm reception at the airport and hotel. Occasionally, a feisty guest such as this commentator may pose a problem. But the hotel can fall back on an empty room on the club floor to deal with it!

Economic Times March 22, 2006

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