Better forms of differential pricing that don't punish flexibility so much

Differential pricing occurs when a company attempts to charge different prices to two different customers for what is essentially the same product. One place we all encounter it a lot is air travel, where it seems no two passengers paid the same price for their tickets on any given flight. You also see it in things like one of my phones, which has 4 line buttons but only 2 work — I must pay $30 for a code to enable the other 2 buttons.

The public tends to hate differential pricing, though in truth we should only hate it when it makes us pay more. Clearly some of the time we’re paying less than we might pay if differential pricing were not possible or illegal.

So even if differential pricing is neutral, one can rail if it punishes/overcharges the wrong thing. There might be a better way to get at the vendor’s goal of charging each customer the most they will tolerate — hopefully subject to competition. Competition makes differential pricing complex, as it’s only stable if all competitors use roughly the same strategy.

In air travel, the prevailing wisdom has been that business travellers will tolerate higher ticket prices than vacation travellers, and so most of the very complex pricing rules in that field are based on that philosophy. Business travellers don’t want to stay over weekends, they like to change their flights, they want to fly a combination of one-way trips and they want to book flights at short notice. (They also like to fly business class.) All these things cost a lot more in the current regime.

Because of this, almost all the travel industry has put a giant surcharge on flexibility. It makes sense that it might cost a bit more — it’s much easier to schedule your airline or hotel if people will book well in advance and keep to their booking — but it seems as though the surcharge has gotten immense, where flexible travel can cost 2 to 4 times what rigidly scheduled travel costs. Missing the last flight of the day can be wallet-breaking. Indeed, there are many arguments that since an empty seat or hotel room is largely wasted, vendors might be encouraged to provide cheaper tickets to those coming in at the last minute, rather than the most expensive. (And sometimes they do. In the old days flying standby was the cheapest way to fly, suitable only for students or the poor. There are vendors that sell cheap last minute trips.)

Vendors have shied away from selling cheap last-minute travel because they don’t want customers to find it reliable enough to depend on. But otherwise it makes a lot of sense.

So my “Solve this” problem is to come up with schemes that still charge people as much as they will tolerate, but don’t punish travel flexiblity as much.

One idea is to come up with negative features for cheap tickets that flexible, non-business travellers will tolerate but serious business travellers and wealthy travellers will not. For example, tickets might come with a significant (perhaps 10-20%) chance of being bumped, ideally with sufficient advance notice by cell phone that you don’t waste time going to the airport. For example, the airline might sell a cheap ticket but effectively treat the seat as available for sale again to a higher-paying passenger if they should come along. You might learn the morning of your trip that somebody else bought your seat, and that you’ll be going on a different flight or even the next day. They would put a cap on how much they could delay you, and that cap might change the price of your ticket.

For a person with a flexible work schedule (like a consultant) or the retired, they might well not care much about exactly what day they get back home. They might like the option to visit a place until they feel like returning, with the ability to get a ticket then, but the risk that it might not be possible for a day or two more. Few business travellers would buy such a ticket.

Such tickets would be of most value to those with flexible accomodations, who are staying with friends and family, for example, or in flexible hotels. Rental cars tend to be fairly flexible.

Of course, if you’re willing to be bumped right at the airport, that should given you an even cheaper ticket, but that’s quite a burden. And with today’s ubiquitous cell phones and computer systems there’s little reason not to inform people well in advance.

This technique could even provide cheaper first-class. You might buy a ticket at a lower price, a bit above coach, that gets you a first class seat half the time but half the time puts you in coach because somebody willing to pay the real price of first class bought a ticket. (To some extent, the upgrade system, where upgrades are released at boarding time based on how many showed up for first class, does something like this.)

Any other ideas how airlines could provide cheaper flexible tickets without eating into their business flyer market? If only one airline tries a new idea, you get an interesting pattern where everybody who likes the new fare rules switches over to that airline in the competitive market, and the idea is forced to spread.

Added note: In order to maintain most of their differential pricing schemes today, airlines need and want the photo-ID requirement for flying. If tickets (including tickets to half a return trip) could be easily resold on the web to anybody, they could not use the systems they currently use. However, the system I suggest, which requires the passenger be willing to be bumped, inhibits resale without requiring any type of ID. A business traveller might well buy a cheap ticket at the last minute from somebody who bought earlier, but they are going to be less willing to buy a ticket with unacceptable delay risks associated with it.

I beg to disagree

> though in truth we should only hate it when it makes us pay more.

I beg to disagree. I hate 'differential pricing' because I don't find it ethical a bit. A cheap ticket won't make me change my mind. Same product/service must cost the same for all.

And 'differential pricing' can't be neutral if it maximizes profits, that is if it's working for the company practicing this, it means it's not neutral for the people.

I think differential pricing must be made illegal, and that will solve the flexibility problem for good.

Best regards,
Burak

Do you want this

Were it illegal, a good chunk of the public would be financially unable to fly. Thanks to differential pricing, a number of people are on the plane for little more than the incremental cost of carrying them, and many can't afford to fly, or fly as much, if they had to pay an equal share.

If you ended differential pricing, vendors would find a way to do it. After all, it's only sometimes they sell exactly the same thing for a different price. There's always some reasoning -- such as the Saturday night stay, or the change rules or whatever.

What you really want is to ban differential pricing that uses one difference as proxy for another (namely tolerance to pay.) Good luck trying to write a law to ban that! If you banned pricing based on fare rules they will just hunt for other proxies. You certainly can't stop them from changing the price based on what day it is (thus pricing higher for last minute purchase) or giving you a discount for buying a return trip. Go that far and you might as well have the government set the prices. In the regulated days we all paid a lot more for air travel, and planes were less full (ie. more wasteful from an environmental standpoint.)

Yes, because I find the alternative unacceptable

>What you really want is to ban differential pricing that uses one difference as proxy for another (namely tolerance to pay.)

Exactly! Actually, the use of proxies is probably bothering me more.

I believe this is a moral issue, so I will accept no excuses.

> a good chunk of the public would be financially unable to fly

So be it. If it was legal to steal, (probably) a good chunk of the public would be able to do things they were unable financially otherwise.

> vendors would find a way to do it

And authorities would find a way to stop it.

> Good luck trying to write a law to ban that

The government, laws and constitution exists for a reason. Laws may not be perfect but if we set the principles right, then courts may decide and laws can evolve.

What disturbed me when reading your article is this (stated baldly): You accept/describe a society where companies are trying to screw the customers and the customers are trying to screw the companies. You then try to find a solution to a problem that exists in that environment.

I think this is a more fundamental problem. I want/assume a society where *normally* companies are trying to make money honestly and customers accept that they need to pay for a service fairly (I do believe supply and demand rather than cost should set the price but charging someone more 'just because he can afford it' is not an honest practice as I see it. Also, I believe that monopolies and cartels should be regulated). Everyone is both a producer and a consumer, everyone contributes. No one should start the day thinking 'how can I screw those fellow citizens more today?'. Of course there will be ill minded or greedy individuals (as exceptions) and laws will be there to regulate and provide a fair ground for fair competition.

Airlines already have business class, first class etc. and that's fair. You pay more and you get more. Why shouldn't they be forced to find similar solutions? If you set the environment right, the right solutions will evolve. If the environment is not right to start with, all you'll get will be competition for how to rip people off unfairly.

I've probably written too much off topic. My point is that I don't find the practice ethical and so I hate it and so I believe it should be made illegal, whatever the cost will be, it will be small compared to living in a society where foul practice is legal and common.

Best regards,
Burak

The market will find a way

Differential pricing is so important to some industries that the market will find a way. If you try to ban it, you'll get more bizarre contortions. One business that uses differential pricing even more than air travel is insurance. We have tried to ban insurance companies from using factors like race in order to meet social goals, but that just drives them to use zip code or anything else they can invent. Insurance companies might argue this isn't differential pricing because what they sell is risk mitigation, and the higher risk you are, the more that should cost.

Of course, airlines could try pricing based on net worth, which is what they really want, but that would create more chaos (and probably be quickly nixed by competition.)

Every year or two, some airline announces it is going to move to simpler pricing. But when there's competition they quickly move back. The public wants the differential pricing. The current airline system has the majority of passengers paying less, and a minority paying quite a bit more, which is what everybody but the minority (corporate flyers) likes most of the time.

basic economic philosophy

> The government, laws and constitution exists for a reason. Laws may > not be perfect but if we set the principles right, then courts may
> decide and laws can evolve.

Left-wing political philosophy.

> What disturbed me when reading your article is this (stated baldly): > You accept/describe a society where companies are trying to screw
> the customers and the customers are trying to screw the companies.
> You then try to find a solution to a problem that exists in that
> environment.

Description of right-wing (or libertarian) political philosophy.

> I think this is a more fundamental problem. I want/assume a society > where *normally* companies are trying to make money honestly and
> customers accept that they need to pay for a service fairly (I do
> believe supply and demand rather than cost should set the price but > charging someone more 'just because he can afford it' is not an
> honest practice as I see it. Also, I believe that monopolies and
> cartels should be regulated). Everyone is both a producer and a
> consumer, everyone contributes. No one should start the day thinking > 'how can I screw those fellow citizens more today?'. Of course there > will be ill minded or greedy individuals (as exceptions) and laws
> will be there to regulate and provide a fair ground for fair
> competition.

Left-wing political philosophy.

I don't want to start a political debate, just point out that the
different points of view reflect different basic political
philosophies. From reading other stuff by Brad it is obvious that
he is a libertarian (whether he calls himself that or not), like
many other net gurus.

My descriptions reflect views on how one thinks society should BE.
As to how society IS: I think it is obvious that many companies
try to screw customers for what it's worth. Sadly, many consumers
buy the cheapest product, without regard to whether it was produced
by child labour, comes from a company which doesn't allow unions etc.
In part, this is a reaction to a general fear of poverty, which
wouldn't exist if the government did more to protect basic
consumer rights.

Apologies

I'll be the first one to admit that I have no clue about political philosophies. What Anonymous said makes sense, sorry if my comment sounded like it had a political smell. I have no idea whether my opinions are left or right, liberal or conservative. I believe in justice, honesty, fairness, human and animal rights; and thought these would be above any politics.

Best regards,
Burak

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