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The economics behind "Basic Economy" – A masterclass in price discrimination

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Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#61

Post by supertrope »

GeneralMayhem wrote: post #54
bluGill wrote: post #43

Earlier quoted context omitted.

I've heard it said that airlines make all their money from interest payments on points. That is the credit card companies are buying miles today, and when the flight is taken the airline faces the charge in between that time they invest the money and collect the interest. I'm not sure if it is true, but it is an interesting insight even if not strictly true.

It's not just time-value. It's also not just tying/advertising (although it is some of that - if I'm getting a ton of "free" points to American, I'm more likely to fly with them). It's both of those, and so much more. Loyalty points work like gift cards in that huge numbers of them go unredeemed for any value, so selling them is just printing money. And unlike gift cards, which are typically denominated in currency,…

Kind of like how GM's credit arm was briefly more profitable than the actual manufacturing.

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#62

Post by kelnos »

wagwang wrote: post #39

Aren't flights at an inflation adjusted all time low and most airlines operating at a razor margin? Seems like the market doing their job. Also price discrimination sounds a lot worse than what it really is? Idk, I don't like that air travel is so easily accessible but, the pricing stuff is the least of our worries.

> Also price discrimination sounds a lot worse than what it really is?

I usually think of price discrimination as the first- or third-degree types (how they define them in the article), that is, charging people different amounts based on how much you think they are willing to or can pay, not on any differentiation of the product. That practice always sounded dirty and dishonest to me.

I wasn't aware that something like basic economy could be considered (second-degree, using their terminology) price discrimination; to me that's just offering a different product, with different features and different quality, at a different price. That honestly seems entirely reasonable to me; basic economy is just a different class of service, similar to how business class is different from economy class. I don't think of biz/first class as price discrimination; to me it's just selling a different, higher-quality product for a higher price.

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#63

Post by rufus_foreman »

esafak wrote: post #3

I prefer airlines that don't nickel and dime. In fact, I prefer to fly less since the experience has consistently deteriorated over decades. If you travel internationally you get the added fun of dealing with border agents. And even they have discovered price discrimination, with their VIP lines. All told, is all this chicanery benefiting airlines?

>> All told, is all this chicanery benefiting airlines?

No. There is no competitive advantage. If they don't implement price discrimination, they go bankrupt. If they do implement price discrimination, they still go bankrupt: https://en.wikipedia.org/wiki/List_of_airline_bankruptcies_i....

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#64

Post by daedrdev »

FuriouslyAdrift wrote: post #47
onlyrealcuzzo wrote: post #9

Earlier quoted context omitted.

It's made it so that relatively poor people can afford to regularly fly all over the world, which is a relatively new thing. Lowe middle income people in lower middle income countries can afford to fly somewhat regularly, and even internationally, too. Flying used to be just for the rich only as far back as the 60s, and for nobody as far back as 200 years...

I'd rather go back to only being able to fly once every few years as opposed to the bacchanal that is Ryanair...

you can do that by choosing a different airline

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#65

Post by kelnos »

TheJoeMan wrote: post #59

With the oligopoly situation, us Americans don't usually have a point of reference, so here's one from a trip I've taken: Indonesia to Malaysia (DPS to KUL), an international 3 hour flight one-way, for $62 on Air Asia [1]. There is enough leg room that you can cross your legs, and they will feed you a meal! There may be some regional differences in "labor" like the US Major airlines claim, but I don't think enough to…

> With the oligopoly situation

I saw the article use the term "legacy carrier", and was curious about its actual definition, and while skimming its wikipedia article read that we went from ten major US carriers in 1991 to just four today (Alaska/Hawaiian, American, Delta, United). Oof.

While many great things did come from deregulation, US airlines' tendencies to race to the bottom and consolidate are not among them. To be fair, though, the more consolidation, the less competition, and the less of a need for that race.

So I'm not sure. Certainly labor costs elsewhere contribute to significantly lower-cost routes, and flights in the US are way cheaper than they were in the 80s and prior, and I think, inflation-adjusted, they're still historically very low, perhaps at their lowest. So what's more expensive in the US? Labor, certainly. Regulation imposes a cost, perhaps more of one here than elsewhere? Are many carriers in other places in the world heavily subsidized by their governments, so they can offer cheaper fares and better service?

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#66

Post by ggm »

gruez wrote: post #53
ggm wrote: post #42

Earlier quoted context omitted.

I'm not saying you're wrong but this is also much the same argument as "why do I pay more tax when I am not using public health" or other community wide benefits. Philosophically you either believe in a price which benefits the community at large, or you want the lowest price outcome for yourself and others to be exposed to their costs.

>Philosophically you either believe in a price which benefits the community at large, or you want the lowest price outcome for yourself and others to be exposed to their costs. How does the community benefit when there's only one price for airfare, and there isn't any mechanism for the poor to save a buck? I rarely rebook tickets, probably because I rarely fly for work, so I can book tickets months in advance. I susp…

The poor don't save a buck when they next need to fly and are exposed to excess costs because of not being able to buy the bucket price seat. The mechanistic way this usually exposes is "only six seats at this price" and they went milliseconds after release.

You truly believe you're right and frustratingly I truly believe you're wrong AND I'm lazy and don't want to prove it or convince you. It's just what I think. Your examples are good. There are equally good rebuttals you could steelman for yourself if you wanted to.

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#67

Post by kelnos »

ggm wrote: post #42
gruez wrote: post #17

Earlier quoted context omitted.

>If we want to stop fare practices we do not agree with then mandating specific bundling in luggage, legroom, food and credit/rebook is available as a regulation. Let's take the one of the items as an example: I rarely rebook, so I'm presumably benefiting from this price discrimination. Why should I support that it be forcibly bundled? I might be sympathetic to having some sort of baseline fare for advertising purpos…

I'm not saying you're wrong but this is also much the same argument as "why do I pay more tax when I am not using public health" or other community wide benefits. Philosophically you either believe in a price which benefits the community at large, or you want the lowest price outcome for yourself and others to be exposed to their costs.

I think then you have to provide a strong argument for why a particular product/service should be considered under the "community-wide benefit" umbrella.

Public health is very clearly to me a collective good: I benefit from others being healthy in so many ways. Similar things can be said about funding schools; I don't have children, but I will benefit from the next generation of adults being well-educated. Welfare and supportive housing reduces crime and general dirtiness and decay where I live, so I'm happy that my taxes go toward that (I want more going toward that, honestly). I don't need to make arguments involving empathy to prove these things make sense, which is good when there are so many people not motivated by empathy.

But I'm not sure affordable flights is a public good. Certainly I want air travel to be accessible to more people; it shouldn't be the kind of thing only well-off people can do. (When I was a kid in the 80s/90s, we didn't have the money to fly, which limited our vacation choices.) But I'm not convinced that regulation should aim to "redistribute" cost so that people like myself should pay more for flights so others can pay less; that doesn't feel like it benefits me or the "public", really.

In general, though, I think the market is actually working for once. Airlines have unbundled a lot of things, and then there's basic economy as well. Even with airline consolidation, (inflation-adjusted) fares are pretty low, and if you want a basic economy fare, or even a regular economy fare (but without checked baggage or refunds or changes), you can get a pretty good price.

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#68

Post by ggm »

tonyedgecombe wrote: post #13
ggm wrote: post #6

Earlier quoted context omitted.

> All told, is all this chicanery benefiting airlines? I am pretty comfortable it contributes to revenue and profit outcomes the board likes.

It feels like competitive pressures in some markets drive away all the profits leaving corporations with no choice but to engage in underhand tactics. Car rentals and printer inks are a couple of examples of the same process leading to really shitty behaviour on the suppliers part.

I agree. Boards should be under more pressure to deliver longterm outcomes of benefit beyond their immediate board term, KPIs and rewards. Possibly the path out is to make some board renumeration tied to 5 and ten year success.

These shitty LCC patterns make short term revenue and the long term consequence of market share moves don't get factored in.

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#69

Post by collinmcnulty »

tines wrote: post #36
legitster wrote: post #24

Very unpopular opinion, but I personally find price discrimination somewhat appealing. Both me and the richest person on the plane get to the same destination at the same time. And yet he payed 4x as much for the same privilege. It's one of the few forces left in the economy that actually reduces inequality (somewhat). I'm an absolute cheapskate and I love flying, so I never really fall for the need to upsell. I'll f…

I too was initially wondering what the problem was with price discrimination---it seems like it's just offering a worse product for less money, so everyone gets to choose. But from what I understand, the article is saying that the problem is that the worse product is _artificially_ worse, in a way that is not commensurate with quid pro quo consumption like we're used to. If I pay less for a Macbook with worse specs,…

I’m not sure I buy the “artificially” as it implies that they have made things worse for Basic Economy in a way that doesn’t relate to distributing a scarce resource. Boarding priority and such are scarce and it makes some sense there’s a market price for them.

I am however concerned about the “everything is for sale” mentality this has brought. It used to be that some things couldn’t be bought with money, you had to wait in line like everyone else. More and more I see “pay to cut the line” and I think that drives class divisions and further damages a feeling of community and egalitarianism.

Re: The economics behind "Basic Economy" – A masterclass in price discrimination

#70

Post by gruez »

ggm wrote: post #66
gruez wrote: post #53

Earlier quoted context omitted.

>Philosophically you either believe in a price which benefits the community at large, or you want the lowest price outcome for yourself and others to be exposed to their costs. How does the community benefit when there's only one price for airfare, and there isn't any mechanism for the poor to save a buck? I rarely rebook tickets, probably because I rarely fly for work, so I can book tickets months in advance. I susp…

The poor don't save a buck when they next need to fly and are exposed to excess costs because of not being able to buy the bucket price seat. The mechanistic way this usually exposes is "only six seats at this price" and they went milliseconds after release. You truly believe you're right and frustratingly I truly believe you're wrong AND I'm lazy and don't want to prove it or convince you. It's just what I think. Yo…

>The poor don't save a buck when they next need to fly and are exposed to excess costs because of not being able to buy the bucket price seat. The mechanistic way this usually exposes is "only six seats at this price" and they went milliseconds after release.

Taking this at face value, it means the airline severely underpriced their fares, because it was snapped up very quickly, which indicates there were people willing to pay more that didn't have the chance. This definitely has implications for equity (eg. if you're not working a desk job you might not be able to spam refresh to snap up those airfares), but I'm not too concerned about it because airlines are incentivized to fix the problem.

More importantly I don't think this problem even exists. Nowadays if you try to book a ticket, you'll be presented with a menu of options, with different fare restrictions. I don't think I've ever saw a situation where a discounted fare was only available for basic economy, for instance. You could always pay more or less for the different tiers within economy.

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