Tuesday, July 20, 2010

Multiple Choice: An Airline Pricing Question

It appears as a stylized fact that airlines are getting an increased portion of their revenue through pricing channels other than the "basic ticket." Examples: baggage fees; ticket change fees; food and drink charges; charges for pillows and blankets; optional and priced plans for early check-in; charges for extra leg room. Kevin O'Leary of discount carrier RyanAir has repeatedly suggested charging for the loo, but I don't think that has been implemented yet.

Why the increased reliance on these new revenue channels?

a) Behavioral economics: Consumers don't notice such charges as readily as ticket prices. (I try this with my cat -- hide the pill in her food, but she outsmarts me every time. But don't let me influence your choice; cats might be smarter than people. One of my favorite econ profs used to famously tell his graduate students: You all think you are smarter than dogs, but you aren't -- you're just quicker.)

b) All these things have positive marginal costs, so the airlines are simply learning to price services in line with their costs.

c) Price discrimination. People who travel with lots of bags, for e.g., are more likely to have an inelastic demand for travel, so use baggage charges as a price discrimination scheme. This is similar to IBM in the old days charging their mainframe computer users by the number of "cards" that they consumed. (For youngsters, in the old days, data and even programs were coded onto paper cards and fed into computers. Yes, it was a pain in the butt.)

d) That perennial issue of taxes, and avoidance thereof. According to an IRS ruling in January, the kinds of fees being discussed are not subject to the 7.5% airline transportation tax. See here for details on the ruling, including the IRS private letter.

e) Because they can.

And the answer is.....

Thursday, July 15, 2010

On the Proper Role of Government

As reported in CNET:
On Thursday, Sen. Charles Schumer (D-N.Y.), posted an open letter to Apple CEO Steve Jobs, expressing "concern" over the iPhone 4's reported reception problems.

Need we say anything more?

Goldman Coughs Up

So Goldman Sachs wil pay the largest penalty ever assessed on a Wall Street investment bank, $550 million. By settling with the SEC, Goldman avoids going to court with the government. I imagine however that there will now be a slew of private suits, even though investors will get $250 million and the US Treasury the rest. Goldman states in the settlement document,
"It was a mistake for the Goldman marketing materials to state that the reference portfolio was 'selected by' ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure."

This is exactly what I have said all along. Their marketing materials were clearly deceptive. Nobody with good conscience should have prepared those.

Now GS has to follow through with some employee discipline.

Subsidize the Media?

Lee Bollinger, ex-Provost of Dartmouth College and current President of Columbia University, wrote in an editorial in the Wall Street Journal that we should consider public funding of the press.

You cannot be serious.

Sure, I can see the arguments -- we fund research in academia, and that is unbiased. Plus we fund NPR and hey, the British have the rock solid BBC. As an economist, can't I see all the positive externalities coming from the New York Times?

Bollinger states that in regard to public funding of academic research,
...there have been strikingly few instances of government abuse. Indeed, the most problematic funding issues in academic research come from alliances with the corporate sector.

Well, I wonder what evidence he has to support this claim. In my view, government funding of research is great at pushing forward the mainstream, generally accepted vision. Climate science is a great example.

Bollinger's argument shows why you cannot use the standard kind of economic efficiency arguments on everything. If we agree to subsidize everything that gives positive externalities at the margin, where will we stop? There are way too many activities that generate benefits that cannot be appropriated through market transactions. A free market is not going to be perfect in that regard. But holding it to the standard of optimality is not right. We have to compare it to the real alternative, which would be public funding of some activities. Can you imagine what it would look like if we were to start funding the media. (Hint: What would happen to Fox? Or Drudge?)

PS. There once was a time when I used to listen to the BBC on a shortwave radio, they were so good. That time is long past.