Sure. But consider airlines, and the revenue management they do, as a contrast.
The basic problem is that there is no single price-per-seat at which it is profitable to fly a plane. Imagine the demand curve as something like $1000/x, where x is the number of tickets sold on the plane. Regardless of the price you pick, your total revenue is going to be $1000, and if the plane costs $2000 to fly, you can’t pick a single price for every ticket such that the plane is profitable to fly.
But suppose you could offer different customers different prices. The person willing to pay $1000 is charged $1000; the person willing to pay $500 is charged $500, the person willing to pay $333 is charged $333, and the person willing to pay $250 is charged $250. Now you’ve got a plane in the air, and $83 in profit (and another person paying $200 would get you up to $283 in profit). But this required you knowing which customer was willing to pay what, which is generally done by time-segregation (the amount of time you book the flight in advance, combined with the number of seats left on the plane) which is itself determined by sophisticated modeling.
There doesn’t seem to be a public outcry about revenue management for airline tickets. Perhaps this is just because people don’t understand what’s going on underneath, or adjusting prices with time feels appropriate in a way that adjusting prices with supply doesn’t, or because it’s been this way for ~30 years and people are used to it now.
If you price the barbecue high enough that exactly the number of rich customers arrive that will buy all the barbecue, in a week from now those customers will be tired of barbecue and there won’t be other customers to replace them.
This is not a problem for auctions, because the price drops when the demand drops, so long as the minimum price is set so that the market always clears.
Analogically with the airlines, the current model should be the “economy class” barbecue, and there should be a new “business class” barbecue—extremely expensive, but without having to wait.
Preferably with some additional differences—sitting in a separate room, with pleasant music and paintings on the wall—to make it easy to rationalize (by both kinds of customers) it as “paying extra money for extra luxury” instead of “paying extra money for cutting in line”.
the current model should be the “economy class” barbecue, and there should be a new “business class” barbecue—extremely expensive, but without having to wait.
That model is used by Disneyworld and other theme parks. You can buy a regular ticket, or you can buy a premium pass which costs more but gives you the right to skip the lines at the attractions.
You can buy a regular ticket, or you can buy a premium pass which costs more but gives you the right to skip the lines at the attractions.
This isn’t actually the case at the Disney park in California (not familiar with anywhere else). There are different season passes, but the premium ones just let you get in on weekends and holiday days and what not.
They do have “fast passes” but those are available to anyone- you go to a kiosk and get an appointment to come back to the fast-pass line at some later time.
Legoland, for example, sells a Premium Play Pass which gives you “front-line benefits”. Universal sells the Express Pass which allows you to “skip the regular lines”.
Disney, I think, is more wary of PR problems, but still you can buy the (very expensive) “VIP tour” which, as I understand, will allow you to ignore all lines.
Customers prefer constant prices. Aside from the perceived unfairness, there are, again, transaction costs. Any time spent by customers trying to figure out how to get the lowest price is still a loss.
Airlines get away with it because airline seats are in limited supply, making it a seller’s market. The buyers have to take whatever the airlines give them. There’s certainly a fair degree of public outcry about it; the fact that there isn’t more is because of a combination of people not understanding it, the fact that most people only buy airline tickets occasionally, and the fact that there’s nothing the public can do about it.
Customers prefer predictable prices. They don’t have to be constant.
E.g., if tickets for an event are $15 in advance and $25 at the door, and this is stated clearly up front, most customers are OK with that… we can plan early and save $10, or we can keep our options open and pay a premium for that privilege.
Airlines get away with it because airline seats are in limited supply, making it a seller’s market. The buyers have to take whatever the airlines give them
On net, airlines lose money. In recent years, it seems to be mostly because of decreased demand (due to terrorism fears and TSA harrassment of passengers), and for decades it’s been because of price wars between airlines. I don’t think this is a market best described as a “seller’s market.”
That’s a very… incomplete prior. Customers also prefer cheap prices. Customers prefer (a lot!) the feeling that they got a deal and bought something on sale.
I also don’t see what’s special about airlines. Pretty much every business would love to price discriminate. Many do through a variety of methods. For example, supermarket coupons are a classic form of price discrimination.
Sure. But consider airlines, and the revenue management they do, as a contrast.
The basic problem is that there is no single price-per-seat at which it is profitable to fly a plane. Imagine the demand curve as something like $1000/x, where x is the number of tickets sold on the plane. Regardless of the price you pick, your total revenue is going to be $1000, and if the plane costs $2000 to fly, you can’t pick a single price for every ticket such that the plane is profitable to fly.
But suppose you could offer different customers different prices. The person willing to pay $1000 is charged $1000; the person willing to pay $500 is charged $500, the person willing to pay $333 is charged $333, and the person willing to pay $250 is charged $250. Now you’ve got a plane in the air, and $83 in profit (and another person paying $200 would get you up to $283 in profit). But this required you knowing which customer was willing to pay what, which is generally done by time-segregation (the amount of time you book the flight in advance, combined with the number of seats left on the plane) which is itself determined by sophisticated modeling.
There doesn’t seem to be a public outcry about revenue management for airline tickets. Perhaps this is just because people don’t understand what’s going on underneath, or adjusting prices with time feels appropriate in a way that adjusting prices with supply doesn’t, or because it’s been this way for ~30 years and people are used to it now.
This is not a problem for auctions, because the price drops when the demand drops, so long as the minimum price is set so that the market always clears.
Analogically with the airlines, the current model should be the “economy class” barbecue, and there should be a new “business class” barbecue—extremely expensive, but without having to wait.
Preferably with some additional differences—sitting in a separate room, with pleasant music and paintings on the wall—to make it easy to rationalize (by both kinds of customers) it as “paying extra money for extra luxury” instead of “paying extra money for cutting in line”.
That model is used by Disneyworld and other theme parks. You can buy a regular ticket, or you can buy a premium pass which costs more but gives you the right to skip the lines at the attractions.
This isn’t actually the case at the Disney park in California (not familiar with anywhere else). There are different season passes, but the premium ones just let you get in on weekends and holiday days and what not.
They do have “fast passes” but those are available to anyone- you go to a kiosk and get an appointment to come back to the fast-pass line at some later time.
Legoland, for example, sells a Premium Play Pass which gives you “front-line benefits”. Universal sells the Express Pass which allows you to “skip the regular lines”.
Disney, I think, is more wary of PR problems, but still you can buy the (very expensive) “VIP tour” which, as I understand, will allow you to ignore all lines.
Customers prefer constant prices. Aside from the perceived unfairness, there are, again, transaction costs. Any time spent by customers trying to figure out how to get the lowest price is still a loss.
Airlines get away with it because airline seats are in limited supply, making it a seller’s market. The buyers have to take whatever the airlines give them. There’s certainly a fair degree of public outcry about it; the fact that there isn’t more is because of a combination of people not understanding it, the fact that most people only buy airline tickets occasionally, and the fact that there’s nothing the public can do about it.
Customers prefer predictable prices. They don’t have to be constant.
E.g., if tickets for an event are $15 in advance and $25 at the door, and this is stated clearly up front, most customers are OK with that… we can plan early and save $10, or we can keep our options open and pay a premium for that privilege.
On net, airlines lose money. In recent years, it seems to be mostly because of decreased demand (due to terrorism fears and TSA harrassment of passengers), and for decades it’s been because of price wars between airlines. I don’t think this is a market best described as a “seller’s market.”
That’s a very… incomplete prior. Customers also prefer cheap prices. Customers prefer (a lot!) the feeling that they got a deal and bought something on sale.
I also don’t see what’s special about airlines. Pretty much every business would love to price discriminate. Many do through a variety of methods. For example, supermarket coupons are a classic form of price discrimination.