15.4.17

TEMPERING PRINCIPLE WITH PRACTICALITY.

John "Grumpy Economist" Cochrane suggests that the problem airlines have with no-shows could be ameliorated with resale of tickets.  Perhaps that's the concert promoter's dodge: sell the place out at a low price, then let a secondary market allocate the tickets to the people willing to pay more.
The one economic point that I haven't seen:  the whole issue also comes down to airlines' use of personalized tickets to price discriminate. (And most of the TSA's job is to enforce that price discrimination by making sure you are the name on the ticket.) If you could resell tickets, the problem would go away. Then the airline must sell only as many tickets as there are seats on the plane, as concerts do. If people aren't going to show, they put their tickets on ebay -- or another quick peer to peer ticket trade platform -- and someone else buys them. Including the airline, if it wants to send employees around. Standby disappears -- want to get on the plane? Bid for a ticket. We still get efficiently full planes -- fuller, even -- nobody ever gets bumped, and the auction for the last seat is going on constantly.
That Transportation Security parenthetical is relevant: the counterterrorism rationale for checking credentials is to prevent  Evil Hijacking Cell from procuring tickets without somebody noticing a large number of one-way tickets being paid for in cash.  Or something.  Thus the people who run the screening posts might have to profile.  Or something.  (And the people who run the screening posts aren't paid much better than the employees of Barnstormer Airways flying DC-3s and code sharing with United.)  You can't eat cachet, but you sure can eat ill-will.

But the vocabulary of economics requires better terminology than "price discrimination" or "market segmentation."  Yes, both phrases are precise, but the connotation, the connotation.
Yes, one of the hardest lessons in economics is that price discrimination can be efficient. Business class cross subsidizes leisure and pays for fixed costs. But the airlines could speculate in their own tickets as well, so its' not clear in a data mining race that scalpers would reap the price discrimination profits better than the airlines themselves.
But there are laws of conservation in economics. One of them is "For every subsidizing market there is cream to be skimmed." And the general-purpose air carriers could well be undoing their cross-subsidies precisely by making business and first class more attractive.
Getting on United vs. Southwest is a study in bad incentives. Southwest: you get a number. People peacefully line up when called, and quickly get on the plane. Southwest also gives free (bundled in the ticket price) bags, so people aren't hauling trunkolads of junk for the overheads. United: Board by groups, and now everyone with a credit card is in group 1. They charge for bags. Midway through the scramble for overhead space, the bins fill up, then people have to start swimming upstream with their huge bags to gate check. If ever there was a way to make an airplane board slower, having people swimming against traffic with huge bags is it. The result, you line up like it's the New Delhi airport (or Southwest, circa 1995) and 100 million dollars of United plane plus crew sits on the ground.  I do it too (I'm a rational consumer!) Quite a few times I have had someone show up with a boarding pass with my seat number in it, and being there first makes a big difference.   Another fully rational response -- you really want to be a high mileage customer. The love/hate relationship with United will get deeper.
Yes, and perhaps startups offering Business and First only will emerge.

The story also illustrates the relevance of institutions.  Steven Horwitz notes that, in the absence of well-defined contracts and clear authority, things go wrong.
The debate does point out the importance of clear and complete contracts for markets to work for mutual benefit. Of course no contract can be totally complete or require no interpretation, and that's what judges are for. Almost certainly, the doctor will sue and courts will sort out exactly what is meant by "boarding," among other things. And whatever those decisions are, they will have the salutary effect of creating clearer expectations for both passengers and airline employees that will, one hopes, avoid these sorts of situations in the future - or at least give us guidance about how best to deal with them. Clearer legal expectations can provide room for negotiated solutions, or at least clarity about which party has which rights.

Without the ability to use prices and negotiation to resolve the conflict at the heart of this incident, it is not surprising that force was necessary. Given United's (reasonable at the time) decision to inconvenience four passengers rather than a whole flight the next morning, four people were going to have to get off of that plane. When there was no other voluntary mechanism for the doctor to keep his seat by buying out another passenger, and when he refused to disembark, United was going to have to use some sort of force to get him to comply with what they thought (perhaps wrongly) were the conditions of his contract to travel.
And over-compensating for one bumping gone badly is likely to be the outcome.  Considering the complexity of the air network and the multiplicity of ways things can become disarranged, it's probably performing reasonably well.

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