This blog is set up for the students of Econ 157 at Stanford University. If you have a comment, please e-mail cmakler at gmail dot com.
Wednesday, May 23, 2007
Un-Bundling
An article in the New York Times talks about how airlines are now charging separately for things they used to bundle in with the price of a ticket. Why are they doing this? Is it welfare-improving?
It seems pretty clear why airlines would want to do this. If one assumes that customers are spread out somewhat evenly over a linear-type distribution, then you can make the assumption that by reducing their prices for a seat on a flight (presumably by reducing services that were once bundled with a ticket such as in-flight meals, movies, etc.) firms will gain some customers. In this sense these changes are very much welfare improving. Firms benefit by gaining more customers and customers as a whole benefit because whoever would have been willing to fly if the price of a ticket had been just a little bit lower now can.
However, at what point does this "de-bundling" become counterproductive for the airlines? I would say that point is fast approaching. When airlines debundle to the point where your paying for legroom by the inch, at least for me, the adverse reaction to the sheer ridiculousness of having to pay separately for every aspect of my traveling experience overwhelms the benefit of any money I might save for doing so. Not only is there an opportunity cost to trying to separately arrange all this stuff which used to be taken care of automatically, but now as an airline traveler I live in constant fear of there always being a cheaper flight out there.
Taken to the extreme, if I was trying to get to, say, vacation in Japan, I could probably sneak a ride on a tanker vessel, take 3 or more weeks to cross the Pacific, all the while living in the filth of some tiny hidden away compartment in the bottom of the ship free of cost. Obviously no one does this even though it's free, they just don't go to Japan. The reason I give this example is, because in my eyes airlines have to strike a balance between debundling to increase profits and turning their "base product" (i.e. a coach class flight to the consumer's destination of choice) into a ridiculous experience that is more of a pain than the gain one might receive from traveling anywhere.
1 comment:
It seems pretty clear why airlines would want to do this. If one assumes that customers are spread out somewhat evenly over a linear-type distribution, then you can make the assumption that by reducing their prices for a seat on a flight (presumably by reducing services that were once bundled with a ticket such as in-flight meals, movies, etc.) firms will gain some customers. In this sense these changes are very much welfare improving. Firms benefit by gaining more customers and customers as a whole benefit because whoever would have been willing to fly if the price of a ticket had been just a little bit lower now can.
However, at what point does this "de-bundling" become counterproductive for the airlines? I would say that point is fast approaching. When airlines debundle to the point where your paying for legroom by the inch, at least for me, the adverse reaction to the sheer ridiculousness of having to pay separately for every aspect of my traveling experience overwhelms the benefit of any money I might save for doing so. Not only is there an opportunity cost to trying to separately arrange all this stuff which used to be taken care of automatically, but now as an airline traveler I live in constant fear of there always being a cheaper flight out there.
Taken to the extreme, if I was trying to get to, say, vacation in Japan, I could probably sneak a ride on a tanker vessel, take 3 or more weeks to cross the Pacific, all the while living in the filth of some tiny hidden away compartment in the bottom of the ship free of cost. Obviously no one does this even though it's free, they just don't go to Japan. The reason I give this example is, because in my eyes airlines have to strike a balance between debundling to increase profits and turning their "base product" (i.e. a coach class flight to the consumer's destination of choice) into a ridiculous experience that is more of a pain than the gain one might receive from traveling anywhere.
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