The Absurdity of U.S. Air Travel: Baggage Fees

On the way home from visiting my brother-in-law's family in Ohio, we changed planes in Chicago. To avoid the baggage fees, we, like most of our fellow passengers, schlepped our luggage through the airport to the gate in Dayton.  Of course, we had to gate-check it because the overhead bins were long-full by the time we could board (boarding group: infinity). The plane arrived in Chicago late, we waited 20 minutes for our baggage to be unloaded, and then we sprinted to (and barely caught) our connecting flight to Boston.  Naturally, we had to gate-check the luggage for that flight as well.

Baggage fees brought U.S. airlines in 2011 a total of $3.4 billion. That amount is almost one-half of the industry's 2011 profits of $7 billion. To double the airlines' profits, the social benefit of which is highly unclear, society incurs many costs:

FREAK-Shot: Christmas Ornament Edition

Reader Tim Kelly sends in photo from a store in Lombard, Illinois:

As Tim writes:

I spotted an interesting sign while out Christmas shopping the other day.  The sign stated the company's "breakage policy," where any broken item must be bought, but that the store will only charge half price on the broken item.  The sign continued offered to repair the broken item, free of charge (I confirmed the free repairs from the shop owner, as it is not explicitly stated in the sign).

The sign was located on a mall kiosk selling Christmas ornaments.  I imagine breakage is a big issue for such a shop, as their product is relatively fragile and are highly enticing to bored kids stuck Christmas shopping with their parents.

My initial instinct upon seeing the sign was that this policy seemed to be inviting people to game the system.

FREAK-Shots: Tequilanomics, and Fenway Gas

From a reader in Annandale, Va., named Christopher Galen, who earlier sent in his daughter's third-grade economics quiz (never too young to start!), comes this pricing quirk:

That's right: the cost per unit is cheaper on the smaller version, which isn't the kind of pricing we're accustomed to in this supersize-me era. (For an interesting related read, see "Does Food Marketing Need to Make Us Fat?" and a Forbes summary of same.) As Christopher writes:

I'm passing along a photo I took Friday at one of the state-run ABC liquor stores in Fairfax, Va. ... Neither [bottle] was on sale, and it contrasts with most other liquor offerings, where larger product offerings tend to have a lower unit cost.

Which led me to wonder -- and no, I had not done any in-store sampling -- is this simply the counterintuitive marketing strategy of a state-run enterprise? Is the store trying to discourage excessive alcohol consumption by making smaller product sizes less expensive?

Wine: Very Liquid

Wine Spectator includes a feature (subscription required) on Nicolás Catena, who received the magazine's Distinguished Service Award for 2012.  His online bio states, “One year, Domingo [Nicolás’ father] realized that it would cost him more to harvest than to leave the fruit on the vines. He asked his twenty-two-year-old son Nicolás, a recent Ph.D. graduate in economics, what to do about such a dilemma. Nicolás advised him not to harvest.”  You don’t need a Ph.D. to see the sense of Nicolás’ advice — if price is too low to cover average variable cost, shut down.  Sadly, “Domingo could not follow his son’s advice with a clear conscience and picked anyway.”  No doubt the family vineyard lost even more money than if Domingo had listened to his son.

"Information Wants to Be Shared"

The Australian economist Joshua Gans, who has shown up on this blog before, has published a new book called Information Wants to Be Shared. It "looks at the struggles facing information content industries -- most notably, publishing (books and newspapers) -- and examines the underlying economics of those industries."  Gans and his publisher, HBR Press, are also running a pricing experiment:

HBR eBooks are all DRM-free but, in this case, if someone were to purchase the book (from HBR or from, say, Amazon or Apple), then they will find on the last page a coupon that they can send to a friend. The friend can then buy the book for only $0.99 directing from HBR. In other words, when you share with a friend, your friend gets a great deal. The usual price of the book is $4.99. I have outlined the rationale behind this at my blog Digitopoly. Basically, it is the sort of thing I advocate for information businesses in general.


Pricing Road Races

The Berlin Half Marathon charges €30 to each of the first 5,000 registrants, €35 for the next 10,000, €40 for the next 10,000 and €45 for the next 2,500, at which time registration closes.  This pricing strategy is new to me:  in the more than 100 road races I’ve done, including one in Europe, a fixed entry fee is charged that jumps up shortly before the race date.  Why the difference?  I don’t think this pricing mechanism is playing off demand elasticities: those who register earliest would be the most avid, low demand-elasticity runners. I don’t see the purpose of what is to me a novel pricing strategy for road races.

Coffee in Berlin

The local coffee shop and bakery near my apartment in Berlin charges €1 for an excellent cup of coffee.  The similar shop near my office, but on a main tourist street, charges €1.99 for an equal quality cup.  Similar quality coffee can be had for €1.50 at a bakery one block from my office in another direction, in a less touristy area with many office buildings.  I can explain the €0.50 difference from my local shop to the third shop as cost-based discrimination: I assume higher real-estate prices generate it.  The €0.50 difference between the two shops near my office must be mainly due to demand-based discrimination:  Tourists are unwilling to search, implicitly have a low demand elasticity and are an easy mark for the shopkeeper.

Summer Solar Power

The City of Austin has given us a windfall:  As of October 1, it will pay 12.8 cents per kilowatt-hour for power generated by our new solar system instead of the previous 3 cents/kwh.  Of course, this seems fairer to me—but it also reflects more closely the value of the power we generate for the grid.  Demand varies over the day and season, and the city prices higher when more power is used (in summers, mostly for air conditioning)—it engages in peak-load pricing, a form of price discrimination.  Supply is limited by capacity, and in some cases in summer the capacity constraint is reached.  The power we produce is storable, presumably for release during the peak times when its opportunity cost is highest.  Thus the increased price paid to us reflects the value of what we generate.  Regrettably, my joy at this windfall is tempered by the simultaneous substantially increased price when we must purchase power because our system fails to generate enough for our needs!

What Surgeons Get Paid, and What Patients Think Surgeons Get Paid

Jared Foran, an orthopedic surgeon in Denver, is a co-author of a new study called "Patient Perception of Physician Reimbursement in Elective Total Hip and Knee Arthroplasty" (PDF here). The authors surveyed 1,200 patients to see how much they thought orthopedic surgeons should make and what Medicare actually pays for a hip or knee replacement.

In an e-mail, Foran describes their results:

On average, patients thought that surgeons should receive $18,501 for total hip replacements,  and $16,822 for total knee replacements. Patients estimated actual Medicare reimbursement to be $11,151 for total hip replacements and $8,902 for total knee replacements.  Seventy per cent of patients stated that Medicare reimbursement was “much lower” than what it should be, and only 1% felt that it was higher than it should be.

Chicken Wing Pricing Redux

About a year ago, I blogged about how odd the pattern of chicken wing prices was at my local Harold’s Chicken Shack.  Here was what they were charging for their wings:

2-wing meal $3.03

3-wing meal $4.50

4-wing meal $5.40

5-wing meal $5.95

6-wing meal $7.00

It is quite odd because they gave you a big discount on the fourth and fifth wings, but charged you a lot for the sixth wing.  There were many incongruities throughout the menu.

Since that time, Harold’s has invested in a fancy new menu up on the wall above the bulletproof glass that protects the workers from the customers.  I’ve also invested in a fancy new phone that actually takes pictures, unlike the phone I carried a year ago.  So this time, instead of having to write down all the prices, I just snapped a photo.