I wrote last week about the wonderful world of airline baggage fees. I even put a version of it up on the Huffington Post. Little did I know that I was going to get new information on how airlines like to make their pricing confusing.
Apparently in addition to adding in separate fees for checked luggage, carry-on bags, pretzels, restrooms, breathing, etc., airlines have a bad habit of changing their prices very frequently. For example, the fare on flights between Atlanta and Las Vegas changes once every six seconds on average. Chris Elliott asks:
Why is this allowed?
If grocery store prices changed once every six seconds, people would be rioting in the streets. In fact, it’s hard to think of any other consumer product with such volatile prices. Even gas prices don’t change this frequently.
And so I wonder — who is letting this happen, again? And should it be happening?
All the free marketers out there, what say you?
If he were a reader, I would put this under reader questions. 🙂 A free-marketer might flippantly say that the changes in prices reflect changes in equilibrium due to shifts in supply and demand. (See lessons 3-5 and 7 here for a review.) Upon further inspection, however, this doesn’t seem to be a particularly compelling explanation. Let’s think about the determinants of supply and demand:
Determinants of Demand:
- Prices of Related Goods
- Number of Potential Buyers
Determinants of Supply:
- Input Prices
- Number of Firms
Therefore, we have 5 things under the demand heading and 4 things under the supply heading that could be making prices jump around. (5 and 4 since saying that prices make prices jump around is a little like a dog chasing its tail.) I don’t know about you, but I am having a bit of trouble convincing myself that any of these factors (or even all of them combined) move around enough to justify the once every 6 seconds price changes. (Also, from what I can tell, this is not simply a case of markets gradually moving towards equilibrium, since the price movements appear to be more random than that.) The closest I can get is to conjecture that perhaps somehow the fares are tracking the price of fuel, but even that argument is tenuous…so no, I don’t think that the price jumps are simply the forces of supply and demand at work.
Aside from the cause7 of the price changes is a potentially more relevant point- regardless of why they happen, rapidly changing prices are not really helpful in either consumer or producer decision-making. Since the price changes seem to be coming voluntarily from the airlines’ end, I will focus on the annoyance to consumers that this situation presents. Expectations of future prices are determinant of demand, as noted above. The rapidly changing prices mean that consumers can’t form reliable expectations about future prices, so it becomes more difficult to decide whether or not to buy something now. Consumers may shy away from purchasing because they don’t want to see a lower price later and feel like they’ve overpaid, or they may try to engage in the airline equivalent of market timing. The latter approach requires a time and effort investment on the part of the consumer and effectively raises the true cost of the airline ticket.
If the price changes are off-putting to and time-consuming for potential consumers, then they are unlikely to actually be profit-maximizing for the airlines, so I am a little confused as to why this is happening in the first place. On the up side, the behavior increases demand for sites like Yapta. So, unless Yapta is paying the airlines to behave in this way, I really have no good explanation. (And no, I am not enough of a conspiracy theorist to actually think that.)
I suppose my answers to the specific questions asked are “because not all consumer annoyances are deemed worthy of regulation,” “the government is allowing it to happen by not regulating,” and “I can’t decide,” respectively.