Would you like flying with that?
Read this article on changes the airlines are making in the way they are pricing flight amenities. There really are two issues in this article – perhaps this is too much for one post, but here goes.
The first issue is called bundling.
The idea is that there is more than one way a firm could “package” its product for pricing purposes. An airline, for instance, could charge one inclusive price and include “complimentary” blankets, beverages, and meals (called pure bundling). Another way would be to price the ticket, the meals, and the blankets separately (called unbundled). A third way would be to offer both an all-inclusive price and allowing consumer to purchase each separately (mixed bundling).
The economic theory behind bundling suggests that for bundling to be profitable, the prices that consumers are willing to pay for each component have to be negatively correlated. The people who place a low value on beverages are the people who place a high value on blankets. It would seem airlines are no longer finding bundling profitable (at least in the coach section).
The second issue, price discrimination, is what I find more interesting in this article.
For those of you who have never been exposed, or skipped my guest lecture in Dr. Coats’ class on Friday, price discrimination can be one of two possibilities:
(1) charging different prices to groups of customers despite the fact that the cost of servicing both groups is identical
(2) charging the same prices to groups of customers despite the fact that the cost of servicing both groups is different
An example of the first type is different prices for seniors and adults in movie theaters. An example of the second type is charging one price at an all-you-can-eat buffet. Firms will find it profitable to price discriminate if they can. A textbook example of price discrimination is business travels versus leisure travelers. As inelastic demanders, business travelers pay higher prices than leisure travelers pay.
But why not go further? Don’t you think that people will pay more for an aisle seat that the seat in the middle? Wouldn’t it increase the profits of the airline if they were to charge a higher price for this seat? Northwest Airlines does. Carol does not like it.
Some international carriers also charge for aisle or bulkhead seats. Northwest Airlines in March began charging $15 for exit rows some forward aisle seats.
Carol Mundt, a retiree who lives in the Washington area, travels frequently for visits and vacations. She heard about Northwest’s new seat assignment charges.
“I was appalled that they would charge me for my aisle seat,” she said while waiting to pick up a friend at Washington’s Reagan National Airport.
Sorry Carol. Might I recommend the seat in the middle?
Any thoughts as to why airlines just started this recently?
April 5th, 2006 at 6:57 pm
I have flown on Southwest Airlines since the age of 2. (My first trip in an airplane was to Astroworld in Houston.) Except on rare occasions when Southwest was unavailable, my entire family has flown safely and inexpensively via Southwest. Let’s face it. Price discrimination is a part of life. If I want to see my favorite football team, it will cost me considerably more for a 50-yard-line seat. If I want to see a famous rock group, a front row view will crunch my budget. And what’s the big deal about sitting in between two people, anyway? We do it on buses, in restaurants, in the classroom, and even in an office conference room. Carol Mundt, get over it — or find a part-time job to pay for that aisle seat. We’ll have to trust that the article is accurate when it states that “intense competition and high fuel prices†are cutting into our flying comforts. Perhaps the costs for additional security measures since 9/11 have also contributed to rising airfares. If airlines need to increase profits to compensate for additional legitimate safety precautions, then so be it. Also, since technology is continually becoming more advanced, it is now quite possible for businessmen/women to communicate successfully through telecommunications rather than running through airline terminals – or buying plane tickets. I must agree, however, that paying a buck for a coke is a bit much. As for future flying, if Southwest fares remain reasonable I’ll continue flying, in the middle seat, for peanuts!