I’m not sure where I want this blog to go yet, but I definitely want to be able to brag about one of my hobbies: getting great deals on things. In this case, it’s relevant to some national news with implications in economics.
A few weeks ago I bought a round trip ticket from O’Hare to LaGuardia on Spirit Airlines (see my itinerary/receipt). If you check Kayak for similar flights 5 weeks in advance, the best price among other competitor airlines is around $185. That’s literally three times what I paid, and the fact that I made a purchase at identical rates when I flew to NYC last December proves that this is no fluke.
How can they do it? By exploiting one of the principles of introductory economics: price discrimination. On top of a base price of $65, the Spirit Airlines fee schedule is nigh ridiculous: you’ll find yourself paying for storing bags in the overhead compartment ($45), for choosing your seat ($18), and for anything more than a dixie cup’s worth of water ($2).
The basic idea is that the company can more properly exploit the slope of the demand curve across consumers. As an admitted cheapskate, my willingness to pay for a leisure trip to New York is probably below the market price as presented by Kayak. But given the opportunity to purchase a ticket without various conveniences “priced in” to the base cost, I’m willing to make the purchase.
Spirit exploits price discrimination in many other dimensions (discounted bag fees for paying in advance online, a $9 Static Fare Club, and numerous coupons for narrow windows of travel such as the $50 codes I found for each of my purchases), and the prices distribution among eventual passengers is much wider than your average legacy airline. In the end I’m able to piggyback off those with greater willingness to pay.
Low-rate airlines are not at all new – check out this podcast for a short and entertaining explanation of the industry. But they do lead to a couple interesting lines of thought.
- As grateful as I am for Spirit, there are many others who find the broken paradigm of more finely granular prices appalling. The notion of ‘price fairness‘ is something I like to think about, and I tried to express an interest in exploring it in-depth in my NSF proposal. As Richard Thaler points out, companies could stand to put more effort into predicting consumer responses to price strategies.
- Earlier this week Spirit Airlines sent out a hilarious email, encouraging me to protest the new legislation which forces airlines to include all mandatory taxes in the advertised fare price. In the case of my ticket to New York, the actual fare price was advertised as $4, which sounds much more impressive than the eventual one-way price of $32. The new law invalidates schemes such as Spirit’s $9 Fare Club, and generally hurts the sticker shock value of all discount airlines. My potential-paper-radar is still under construction, but I don’t doubt that someone will use this as a natural experiment to measure the consequences of tax salience.