This is inspired by examples I’ve seen in Tyler Cowen and Alex Tabarrok’s principles book and the supplementary blog.
Over the weekend, I flew US Airways from Memphis to DC and back. On Friday, I took a plane that stopped in Charlotte and continued on to DC. I didn’t even get off the plane in Charlotte before proceeding to DC.
For fun, I decided to check out one-way fares on this route. Suppose Carl needs to book a flight from Memphis to Charlotte and Murray needs to book a flight from Memphis to DC. Both are traveling tomorrow morning. What will they pay?
Travelocity shows that Carl will pay $279 to take US Airways flight 1730, departing from Memphis at 7:35 AM and arriving in Washington DC at 12:47 PM with a connection in Charlotte. Murray will pay $645 to take US Airways flight 1730, departing from Memphis at 7:35 AM and arriving in Charlotte at 10:12 AM.
You might notice something odd: Carl and Murray are going to board the exact same plane in Memphis. Murray is getting off the plane in Charlotte. Carl is staying on that plane until it gets to Washington DC. Murray is paying $366 more than Carl even though he is taking a shorter trip on the same plane.
A. What gives? How can we explain this kind of pricing behavior?
B. This is the kind of thing that inspires moral outrage and righteous indignation about “corporate greed.” Can we turn this argument around, though? In other words, how might we respond to Murray when he arrives at the customer service desk angry about having been gouged by the airline? For the record, I suggest that you never take this approach with an angry customer.
Obligatory disclosure: I didn’t get any valuable consideration for mentioning any of the products mentioned in this post.