Last week, I put forth a couple of questions on airline pricing and got a lot of great comments in response. As I mentioned, the post was inspired by a few things I’ve seen on the blog that accompanies Alex Tabarrok and Tyler Cowen’s textbook. David Youngberg offers links.
The answer involves a bit of knowledge about American air travel. Charlotte is a hub for US Airways, so there are relatively few substitutes for US Airways if one is trying to fly from Memphis to Charlotte. There are a lot of substitutes for flights from Memphis to DC, however–indeed, I think Delta has several direct flights every day. The market for flights from Memphis to Charlotte is less competitive than the market for flights from Memphis to DC.
I also asked how the airline might respond to an outraged Murray, who thinks he is being gouged by a ruthless, exploiting corporation. Is Murray the victim of an injustice? I think the answer is a clear “no,” and it goes beyond the principles of caveat emptor and voluntary trade. Murray is claiming that he deserves a flight at a price lower than he has demonstrated that he is willing to pay. In other words, Murray demands that resources be redistributed from US Airways shareholders to him. I think the best, albeit the least socially astute, response is “you have demonstrated that you are willing to pay $645 for this flight. Why should we charge you any less? Why should we take from our shareholders–which include not just corporate fat cats but people from across the income distribution who are trusting us with their property–in order to fatten your wallet? Why, in other words, should we pay more than a flight from Memphis to Charlotte for the $645 we sought when it was obvious that you were willing to accept a flight from Memphis to Charlotte in exchange for your $645? You were willing to pay $645. Why should we accept less?”
Obligatory Disclosure: I received no valuable consideration from any firm mentioned in this post. I probably own US Airways stock through a mutual fund, but my holdings aren’t enough to induce strategic/corrupt blogging.
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I would agree that there shouldn’t be a law against it, but I think you’re not very specific in your terms. In my view, justice is related to torts. Gouging doesn’t involve any force or fraud, so no torts involved. Morality is different. People care about fairness or honesty so much that it influences their behavior. If they think someone is being unfair, they are less likely to trade with them in the future.
Hence, ignoring any obvious economic effects (people or competitors see the mispricing and adjust their behavior to prices and profit opportunities), I’m not really satisfied with your answer. Market adherents do themselves a disservice when they say that a company should only care about profits and not care about being dishonest or unfair. Being honest and fair is a long-run profit maximizing strategy when the people you trade with care about those things.
In a capitalist system I do not have to buy from you and you do not have to sell to me. If I plan in advance, I can fly from LA to London UK cheaper than I could fly to New York if I waited until the last minute.
The other thing you can do is use Priceline – bid the cheapest fare you can see bidding in advance, or in the example here, bid the fare from Memphis to DC.
Other than that, you could always drive – I imagine it would take about 10 hours. As you drove across the Smokey Mountains you would see global warming in action from all those greenhouse gases produced by trees. You would of course miss your free grope at the airport.
This is the second time in modern history that trees have wronged us. How much more are we willing to take?
I can very easily explain why!
Most often it would be in both the sellers and buyers interest to not take the highest amount the buyer is willing to pay. Obviously the buyer will be less satisfied with the deal when paying the highest price, and much more satisfied if the price was discounted. I think you now see it is obvious that life-time value of that customer increases a lot by lowering the price.
This is true in most situations but when a company has monopole or when the customer is only going to make business with this company once.
I entirely agree that it is not unjust for an airline to charge more for a shorter flight than for a longer flight. But to point out, as the author of this post does, that a person who has paid for the shorter flight has demonstrated that he is willing to pay the price does not address at all the issue of whether the price is unjust. A premise about demonstrated preference might well form part of a good argument in support of the justice of the airline’s pricing scheme; but merely to point to demonstrated preference and to add nothing more to the argument does not suffice.
“does not address at all the issue of whether the price is unjust”
What? What is it that makes a price unjust? Be specific, please.
If the price is only possible due to the use of force that airlines are supporting through lobbying actions/etc I would say it’s unjust.
If the airlines charge higher prices because they have used regulations to keep out competition, or anti-trust laws to prevent competitors from “predatory pricing” then they are engaged in unjust pricing.
Price is never set based on the cost of the product. It is set by a negotiation between Buyer and Seller. The price will fall until the Buyer feels it will not fall further. The negotiation in the Buyers mind has reached the point the Seller will not offer a lower price. The parties make an exchange in N Theory. According to Supply and Demand theory the price will rise until the Seller earns a return adequate for his investment.
In the case of the airline ticket consumers are allowing American Airlines to earn a handsome profit since either they feel the offerred price is as low as it will fall, or the airline will not accept a price as low as the leg to D.C. for cost reasons related to their business.
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