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Fun With The Coase Theorem, Airplane Seat Edition…

March 14th, 2011 · 15 Comments
Econ 101

I am firmly of the belief that people intuitively understand economic principles, even if they don’t consciously recognize them as such. Case in point, from The Consumerist:

It *is* quite an idea, Consumerist readers…in fact, it’s closely related to the Coase theorem. The Coase theorem is best illustrated via an example. From Wikipedia:

Coase developed his theory when considering the regulation of radio frequencies. Competing radio stations could use the same frequencies and would therefore interfere with each others’ broadcasts. The problem faced by regulators was how to eliminate interference and allocate frequencies to radio stations efficiently. What Coase proposed in 1959 was that as long as property rights in these frequencies were well defined, it ultimately did not matter if adjacent radio stations interfered with each other by broadcasting in the same frequency band. Furthermore, it did not matter to whom the property rights were granted. His reasoning was that the station able to reap the higher economic gain from broadcasting would have an incentive to pay the other station not to interfere. In the absence of transaction costs, both stations would strike a mutually advantageous deal. It would not matter whether one or the other station had the initial right to broadcast; eventually, the right to broadcast would end up with the party that was able to put it to the most highly valued use. Of course, the parties themselves would care who was granted the rights initially because this allocation would impact their wealth, but the end result of who broadcasts would not change because the parties would trade to the outcome that was overall most efficient. This counterintuitive insight—that the initial imposition of legal entitlement is irrelevant because the parties will eventually reach the same result—is Coase’s invariance thesis.

Now, I’ll take a bit of creative license and modify the example for the situation at hand:

Econgirl developed her theory when considering the regulation of airline seat reclining. Competing airline customers could use the same space and would therefore interfere with each others’ enjoyment of the flight. The problem faced by regulators was how to eliminate interference and allocate space to airline passengers efficiently. What Econgirl proposed in 2011 was that as long as property rights in these spaces were well defined, it ultimately did not matter if adjacent airline passengers interfered with each other by trying to occupy the same space. Furthermore, it did not matter to whom the property rights were granted. Her reasoning was that the passenger able to reap the higher economic gain from taking up space would have an incentive to pay the other passenger to get out of the way. In the absence of transaction costs, both passengers would strike a mutually advantageous deal. It would not matter whether one or the other passenger had the initial right to take up space; eventually, the right to spread out/recline/etc. would end up with the party that was able to put it to the most highly valued use. Of course, the parties themselves would care who was granted the rights initially because this allocation would impact their wealth, but the end result of who takes up space would not change because the parties would trade to the outcome that was overall most efficient.

For example, if reclining your seat is worth $5 to you, but being able to put my laptop on the tray table is only worth $3 to me, it is efficient for you to recline and me to find another place to put my laptop. If we could negotiate and pay each other off, you will end up reclining your seat regardless of what the airline tells us is the “proper” thing to do. However, if the default is for the stewardess to tell you to not be a jackass and keep your seat up, I will end up with somewhere between $3 and $5 in my pocket as a result of the subsequent negotiation. If, on the other hand, the stewardess tells me to suck it up and let you recline, I won’t get squat in compensation except for perhaps another bag of Doritos munchie mix because the stewardess knows that I’m cranky.

It’s important to note that Coase’s argument only holds when there are no costs or barriers to bargaining. In practice, the efficient outcome may not be reached if the guy behind you thinks you’re a big creeper because you try to pay him in return for him not complaining about the position of your seat. Not that I’ve tried or anything. I’m also pretty confident that it’s only a matter of time until the airlines figure out how to capture the payouts for themselves rather than keeping them within the affected parties…which technically doesn’t affect the efficiency of the outcome but certainly affects the distribution of value.

Tags: Econ 101

15 responses so far ↓

  • 1 Dick Moser // Mar 14, 2011 at 8:06 pm

    What if our utility value of money is dramatically different? Will we still arrive at the most economically efficient solution?

  • 2 misterxroboto // Mar 14, 2011 at 8:11 pm

    god i love this, especially the hedge about how it has to be a system with no transaction costs.

    forgive me for not remembering, in a system with transaction costs, the right is assigned to the party who would have higher costs to meet the other, correct?

    i suppose in a system like this, there are very low txn costs, but it’s the principle, people!

    this stuff gets really fun when you torture a 1L about torts.

  • 3 Punditus Maximus // Mar 14, 2011 at 9:48 pm

    What I like is that he never thought of paying the guy $20 not to recline his seat in a private transaction. The only solutions being discussed were either sabotage or authoritarian.

    Transactions costs aren’t just physical; they’re mental. A nation of serfs is not a nation of artisans.

  • 4 Andrew // Mar 14, 2011 at 10:13 pm

    This is actually the example I use all the time in classes to illustrate the Coase Theorem – so this post just made my day.
    I am literally going to try one day to pay the guy in front of me $5 to not recline, or go on a sliding scale.

  • 5 BradyDale // Mar 15, 2011 at 12:19 pm

    I can’t wait for someone to post about actually trying this. I’m willing to bet most folks would wig out, refuse the money and recline out of spite.

    Offering money to people not to do something is just not normal in polite society.

    But I would love read about what happened to someone if they tried — at least so long as I don’t have to see it.

  • 6 Dan L // Mar 15, 2011 at 5:29 pm

    Isn’t this sort of a counterexample to the Coase Theorem? In point of fact, the right to the bit of space behind the seat *is* well-defined–it is owned by the person in the seat, who can recline at will. Also, there are essentially no transaction costs or barriers to bargaining. So why does the Theorem fail? The obvious answer is that very few people think of paying off the person in front of them, and those few that do think of it will not attempt it because they don’t want to look like weirdos. Although one could call this a “social” barrier to bargaining as econgirl does, I think it’s really a failure of rationality (in the economic sense).

    My favorite “good” example of Coase’s Theorem is domain names. Domain names are/were handed out in a ridiculous fashion (essentially first come, first serve), and yet most domain names are owned by the “right” owners.

  • 7 steve // Mar 15, 2011 at 9:03 pm

    you may need a supportive airline staff to help ensure agreements were enforced. if you paid a guy $20 not to recline his seat and he reclined anyway, what are you gonna do? Perhaps the lack of enforceability, i.e. well defined property rights, might be a barrier to trade

  • 8 Dave // Mar 16, 2011 at 3:26 am

    The airlines have figured it out. Well, at least one has: JetBlue has a special section in coach class called “even more leg room seats” that really do offer sufficient leg room to probably eliminate the bumped knees problem for anyone shorter than Wilt Chamberlain. After purchasing a ticket, when you choose your seat, you are offered your choice of seats, with the warning that, if you choose an “even more leg room seat”, you will be charged an extra USD40 beyond what you’ve already agreed to pay for the airfare. “Even more leg room” buys you four extra inches of space (plus a few other perks: http://www.jetblue.com/flying-on-jetblue/onboard/even-more-legroom.asp ), so that works out to USD10/inch! However, I do usually pay the fee and enjoy the space, so they certainly are capturing my payouts.

  • 9 Dave // Mar 16, 2011 at 3:38 am

    Two facts I forgot to mention in my preceding post that might be of interest, from an economic perspective:

    (1) There is one more benefit that you usually get by purchasing an “even more leg room” seat that makes it worth the money for many people: Because people who fly JetBlue are typically the cheapest of cheapskates, not many people take them up on the “even more leg room seats” offer. As a result, if you travel in the “even more leg room seats”, you’ll often find that the seat next to you is empty (often, the whole row is empty! — even if the plane is, otherwise, filled to capacity). This gives you more side-to-side room as well. (Note, however, that this “benefit” of “even more leg room seats” is not guaranteed (JetBlue would certainly like to fill them all!) — it’s just a typical side effect.)

    (2) JetBlue has only coach class seats, so you can’t pay to upgrade to first class or business class at any price — “even more leg room” is the only possible upgrade.

  • 10 Schisma Tism // Mar 16, 2011 at 8:21 am

    Simple fix: formalize this transaction. Each seat gets a ticket which can be traded with the seat immediately behind the owner of the seat and it can be traded either freely as an assurance of compliance with the request to not sit back or traded for other forms of compensation, such as money.

    This way, the passenger who wishes the seat in front of him or her be left up wouldn’t feel so ashamed or embarrassed to ask — and the person in front of him or her can simply refuse the transaction/agreement if that’s what they desire. In case the passenger in front changes his mind later, the pair can resolve the issue or the stewardess can resolve the matter after the passenger shows proof of previous agreement and force the passenger in front to abide by that agreement.

  • 11 Schisma Tism // Mar 16, 2011 at 8:28 am

    Also, carbon emission trading.

  • 12 econgirl // Mar 16, 2011 at 5:04 pm

    @ BradyDale: I think you’ve just made a good argument for everyone learning basic economics, since my guess is that people would be more receptive to economically efficient transactions once they gave the matter some thought.

  • 13 Dave // Mar 17, 2011 at 1:04 pm

    I think the good argument that has been made, overall, is that nobody would want to travel on a plane with economists. When non-economists plop their rears into an airplane seat, they simply want to sleep or work or read.

    They do NOT want to deal with some whiney, over-sensitive guy, who apparently wasn’t spanked often enough as a child, complaining that they put their seat into the regular position, and they certainly don’t want to deal with him offering them money to put their seat into the takeoff-landing position. Likewise, they don’t want to deal with some money-grubbing jerk in front of them offering to keep his seat in the takeoff-landing position in return for a few bucks. They just want to be left alone so they can sleep/work/read. (On the other hand, they might be willing to pay either the whiney guy or the money-grubbing jerk to shut up and leave them alone.)

    (note: By the way, what you’re calling “reclined” is actually the regular position. The other position, “upgright”, was intended by the engineers who designed the plane seats to be used only for takeoff and landing; although, so-called safety experts have insisted that a few seats on some planes be stuck in that rather uncomfortable position at all times.).

  • 14 econetti37 // Mar 18, 2011 at 8:47 am

    Why does it have to be money? It could be something else of value. Couldn’t I offer to buy the person in front of me a drink ($10), instead of offering them $10 in cash? The utility of the drink might be higher than the impersonal nature of cash. Plus, there is a value to friendliness. The length of the flight is another factor, too. Maybe I should buy the person one drink per hour of flight. I have never done this, but look forward to pissing off the person in front of me on the next flight.

  • 15 Bruce True // Mar 26, 2011 at 1:51 am

    Isn’t this affected the the potential to cause considerable seat switching, that would have cause high transaction costs?

    Ideally the a market in space behind the seat would I think result in those roughly interspaced, people who don’t mind not reclining with people behind who don’t want anyone reclining into their state with seats with those who want to recline with a person not bothered by that (perhaps a small person who is not going to use a laptop). This might mean a lot of seat switching that could delay takeoff.

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