You Say Tomato, I say Tomato. Let’s call the whole thing off.

Switzerland is one of the sticklers for the Doha round of World Trade Organization talks on agriculture subsidies. We have mountains here, and a good way up some of those mountains are farm animals. It costs a fair amount of money to bring those products to market. Wherever those animals are, farm products are carefully inspected before going to market. Salmonella has not been an issue here. NPR had a story on this back in 2005.

In the meantime it’s tomato season back in New Jersey and elsewhere in the States, and it has been marred once again by a Salmonella scare. Official warnings have been canceled as of July 21, but a new warning has been issued regarding jalapeño peppers. Here we go again. U.S. farming practices remain a disaster. Thanks to lax regulation of the food supply we have had repeated scares. Last year it was spinach, with a bunch of pigs having taken a romp in a California field. What will it be next? People often mention the food supply as a potential terrorist target. I don’t see why they should bother. The farmers are doing a fine job of poisoning Americans without additional help.

Here is why the WTO is so important in this discussion. The Swiss pay a premium to protect their food supply through tighter inspection regimes and a higher standard of farm practice. Americans do not pay that premium. If the Swiss authorities deregulated their agriculture, they would in effect be reducing their standards for food quality. Perhaps instead Americans should consider raising their standards so that fewer people get sick.

Final Thoughts on Airline Upgrades

As we discussed, customer loyalty is worth something to airlines. They spend billions of dollars worth of free services each year in order to maintain that loyalty, and their strategic alliances are intertwined with that customer loyalty.

And so let’s look at the customer. Be the customer a frequent business traveler or a casual tourist, one problem that could exist is that he or she may not be able to afford an upgrade if it is somehow connected to actual dollars. And while in my previous post I suggested that the cost would be in miles, there would be a conversion from dollars to miles. And so some segment of the customer based could end up unable to participate in the auction because of wealth disparaties. Such a customer might then be inclined to pick another airline that has a different upgrade allocation mechanism such as what we mostly have today.

That’s the risk. Is it worth it?

More On Airline Upgrade Auctions

When last we left our hero (me) we were talking about airline upgrade auctions, noting that Priceline already does this for seats.

Some of the problems that airlines would face with auctions would be these:

Upgrades are a huge perq for elite frequent flyers, where they either make or strongly influence their airline selection. Business travelers in particular make up the vast amount of revenue.
Inviting frequent flyers to use their miles as value to get these seats could imply that their miles in fact have value, and the IRS and SEC might like to know that. For years airlines have fended off attempts to view miles as any form of liability that would need to be written down. While I am sure that in recent times with the current set of passenger-hostile rules, this notion has at least been temporarily dispelled, one could easily envision governments taking a second look if they believed there was a logical monetization.

There are several approaches that may yet be available to airlines:

Run several auctions for the same seat, so that those in the same class are allowed to buy the seat first. This would be very close to how things are run today.
Provide elite members a discount on the final price. For instance, if you are a silver member, maybe you would get a 20% discount, but if you are a gold, perhaps that discount rises as high as 50%.
Reserve some seats for the Old Fashion methods of buying them in advance and using miles.

We may already be past the point where we could ever expect the auctions to be run in real money, simply because so many people have so many miles banked.

Potential Revenue of Business Class Upgrades

What this graph shows is normal business class revenue in red, and the potential for additional revenue in green. Note that the horizontal green line just indicates a random equilibrium. In reality that price would jump up and down based on the popularity of the flight, its length, and just how important it was to someone to get upgraded.

Again, this would need to be done in such a way as to preserve customer loyalty.

Airline Upgrade Auctions?

Bureau of Economics Those of you who know me know of my interest in economics, which started literally on my first day of college, thanks to a great professor named Joseph Seneca. He managed a lecture in 1983 of over 400 students in Scott Hall at Rutgers University, twice a week, for two semesters at 8:05am for an hour, covering Introductions to Micro- and Macroeconomics.

With that start in mind, I have learned to ponder my day-to-day issues with an eye on supply, demand, marginal benefit and cost, trying to understand profit maximization. It’s also why I like reading books like Age of Turbulance, by Alan Greenspan. While I do not subscribe the Greenspan’s anarcho-capitalistic approach to managing the economy, I haven’t been chairman of the Federal Reserve, so I’ll assume he knows a few things more than I do on the subject.

This brings me to two of the most remarkable Internet creations: priceline.com and eBay. eBay is remarkable not so much because of the vast amount of innovation that went on in its inception. Rather the founders applied very straight-forward economic doctrine to bring buyers and sellers together in a common market place so that goods could be sold at their optimal prices. eBay is elegant in its simplicity.

Priceline.com works along the same lines as eBay, but makes legitimate the grey market in airline tickets, hotel visits, and the like. And who can’t like a company that employs William Shatner as its spokesman? There are several limitations, however, to priceline that have often stopped me from considering them. One of the big ones has been an inability to upgrade to a higher class of service. This perhaps may sound snobbish, but sitting on an airplane with my legs cramped in front of me for 12 hours is not my idea of a good time.

And so I’ve wondered about an idea: why not let airlines auction upgrades? If the airline hasn’t sold a business class seat by the time of the flight, they could hold a pre-arranged auction that consisted of bidders who wanted the seat, complete with reserve pricing. Wouldn’t this maximize the airline’s profit? After all, people have done this on eBay without airline participation allowing individuals to maximize their profit, leading airlines to put many controls in place to prevent it.

There are of course a few problems. If you’re a very frequent flyer you expect to be upgraded all of the time without having to go through the hassle of an auction. And if you’re just a frequent flyer you expect to get upgraded some of the time. If you’re a business class traveler who normally pays the a factor of three more than the discount coach seat, you may instead decide that it’s cheaper to bid in the auction and get the same results, thus causing the airline to lose money on the proposition.

I’ll discuss mitigations to some of those problems in a future post. For those wondering about the picture, that’s the Bureau of Economics, which is part of the U.S. Federal Trade Commission, and not a Greek temple.