People resond to incentives, parts 10371 and 10372

Price discrimination is profitable, so firms try to price discriminate. But consumers don’t like paying high prices, so they try to avoid price discrimination. An April 7 Wall Street Journal article (registration may be required) by Scott McCartney illustrates these propositions nicely.

A one-way ticket from Washington, D.C. to Louisiana (the article doesn’t state which city) costs $698. A round-trip ticket costs $218. Travelers who want to fly one way buy round trips and throw away away the return-trip tickets.

Flying round trip in the middle of the week is especially expensive. New York to Houston and back is $1972. But a round-trip ticket that includes a Saturday stay is much cheaper. One such ticket for New York and Houston is $232. So some travelers buy a round-trip ticket that includes Saturday from New York to Houston and a second round-trip ticket that includes Saturday from Houston to New York. Savings: $1508.

Flying into some hub airports is expensive. New York to Detroit is $559. But New York to Detroit to Akron is $221. Guess what some New York to Detroit travelers do? (If they don’t have baggage to check.)

Courtesy of Craig Depken, economist at U. Texas–Arlington, comes another example. The Texas Rangers are giving to some of their ticket holders scrip that is good for free food and beverages at their ballpark. The scrip seems to be easily counterfeited. Guess what will happen. Extra credit: how long before the Rangers declare the scrip invalid?

(Mrs. Newmark, who has no economics training but who’s been living with an economist for 26 years, suggests that maybe the Rangers expect counterfeiting and are using the free food as a way to sell more tickets. Alternatively, she hypothesizes that the ballpark food is poor enough, and travel and ticket costs high enough, that counterfeiting will impose small costs on the Rangers.)


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