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.
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.
