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Airline Pricing

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11/14/2011

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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