The central idea behind the principal-agent model is that the principal is too busy to do a given job and thus hires an agent. However, being too busy also means that the principal cannot monitor the agent perfectly (otherwise their would be some transaction costs involved). In this relationship, we face the problem of the existence of asymmetric information, which comes as adverse selection and moral hazard. In class we learned that adverse selection is hidden knowledge and moral hazard is hidden action. If the principal and agent had the same objective function, these two problems would of course not exist. The bilateral principal-agent model may seem too abstract to be useful, and so realistically, it's more like a trilateral model. The agent has to content with the best interest of their client as well as the best interest of their employer.
A time I recall where I had to "serve both masters" such as a client and an employer would be at my hotel job. I answer to two principals: the guests and my manager. It would not just be me in these types of situations but other student workers as well--even supervisors, so I will refer to us generally as the employees.
Many disagreements arise because of our rates. Our rack rates start at $122. However there are discounts for those who have students that attend the university, are students themselves, are part of the Alumni Association, or are faculty/staff. Whenever we, as the employees, had to quote this rack rate, the common response comes with a tone of surprise and usually unhappiness. When the guests make their reservations via phone or in person, right off the bat, we would usually ask them whether they have a student who goes here or whether they are an alumni. If they say yes, we bring the rates down no problem. We do this because there were so many instances when people would complain and ask for a lower rate, so we wanted to save ourselves from that verbal hassle. So then we would quote people at $112 (rate for students and family of students) at initial inquiry and thus we rarely use the rack rate. We tend to sympathize with the guests and realize that we are indeed overpriced. However, my manager recently sent an email to all supervisors/students that sales have decreased since last year. He also stressed how if guests receive these certain discounts, they must prove it in some way. For example, if the guest is a student/family of a student, there needs to be an iCard or UIN involved or if they are an alumni, they need an official Alumni Association card.
Obviously customers have the objective of wanting to get the most quality room with the cheapest rate. My manager, after being aware of the decrease in sales, has been concentrating more on increasing the sales. We can infer that the two principals would not see eye to eye on what counts for good performance on the agent. Thus, the employees often struggle with whether to keep the customers happy or our manager happy.
After that email, I stopped quoting the discounted rate. However, I have noticed that supervisors were often times still doing it when my boss is not around, which are times after check-in every weekday and all day of the weekends. Since our manager is rarely around during the check-in process, we still never check for iCards or Alumni Association cards even after the enforcement in the email. So I guess we can see some moral hazard in that due to the agent's hidden action. But honestly, it usually depends on the guest. When they are rude or inpatient, we tend to be more strict and follow the manager's rules. And then the rare times my boss is here, we have to satisfy his interests so we do what we are told which then becomes less beneficial for the customers because they could have saved ten bucks.
I'm not sure if these issues could ever get resolved due to some people's nature of stinginess or frugality. There is also that lack of interaction between the two principals. So I believe there is no one way to settle it. The goal for us employees is to try and satisfy the customers' needs when the manager is gone and then satisfy the manager's needs when he is here. Obviously, since we are instinctively paying more attention to the customer, this will probably not help the manager with his objective to increase sales.
It's also interesting that the supervisors are supposed to monitor the students as one of their roles but we end up being on the same team nonetheless, and the manager is just totally unaware. We don't have any incentives correlating with how much effort we would put in to help him achieve his goal anyways, so as long as we follow his rules in his sight, we will still get paid our hourly wage.
Let me correct one thing you said up front, before getting into the body of your post. The principal typically hires an agent not just because the principal is busy but because of comparative advantage and in some cases because of absolute advantage. You go to a doctor when you get sick rather than treat yourself because the doctor can diagnose you properly and also because the doctor can write a prescription for medicine that is not sold over the counter. These are things you can't do yourself.
ReplyDeleteYour story sounds like a reasonable principal-agent triangle, in terms of the price discrimination you discuss with preferred customers getting better rates. But let me note something else that I think is going on as well.
The Union Hotel may have once been the preferred location for travelers to campus, many of whom if they are not preferred customers would pay the higher rate but really it would be their employer who paid. So they didn't care that much about the rate. But now there is competition from the iHotel and some of the Hotels on Neil Street, which are more convenient for auto and may have other amenities that appeal to business travelers. Those customers, in other words, would only book in the Union Hotel if the other places are sold out. This means the people whom you are getting are apt to be more price conscious.
I don't know what others on campus think of the Union Hotel, but from where I sit maybe it is still around because it was important to the campus in the past and nobody particularly wants to think through the alternative of closing it. But that receipts are down might eventually force the decision. Surely there are times of the year when it is needed but I wonder if it operates under capacity most of the time.
Thanks for the correction. I should have also stressed the idea of comparative and absolute advantages.
DeleteYes, most who stay here do it because we are in the heart of the campus. But as you mentioned, those who have cars may go to the iHotel or hotels on Neil Street. However, it may be inconvenient for them to find parking on campus especially during the weekdays. Thus, since our hotel offers free parking, that's why most parents tend to stay here.
During special events weekends such as Mom's Weekend, Dad's Weekend, Homecoming, Graduation, etc, we have pages of waiting lists. The price goes up to $170 and it's a two night minimum for those nights, but surprisingly so many people want to stay here for the convenience.
Yes, I agree. No one is thinking about closing it since it is important to this campus. However, even with the decrease in sales, I don't believe it would be enough to close down the hotel as a whole. There might be adjustments made in how many workers are hired or maybe the rates itself.