Airline pricing – good or bad?

Some people (typically economists) love airline pricing and think that flexible, demand-based prices should be applied to all sorts of things (such as restaurants, in this posting from Rafi Mohammed). After all, if there’s a shortage of something (Saturday night reservations), it can be cured by increasing prices; this displaces price-sensitive customers to other nights, when the prices can be cut in return. Everyone wins, so why not?

And yet the pricing policies of airlines are among the most hated of all industries. Bill Saporito here suggests that the US Department of Transportation is imposing rules to increase the transparency of airline surcharges. The European Commission has already acted similarly, and the UK’s advertising standards authority has ruled several times against the misleading advertising of a number of airlines.

Do people dislike demand-based pricing because it is difficult to predict what you’ll pay, which imposes an extra cognitive load? Maybe, although I suspect this effect isn’t consciously considered by most people: instead, the cognitive laziness takes the form of anchoring. We anchor to the lowest available price and any higher peak-time price feels like a rip-off.

The dislike of surcharges is partly for the same reason – we anchor on the base price, and each extra charge feels like an extra hand in our pocket. Also, surcharges are often based on the concept of “drip pricing” – get people to start a buying process at a low price, and then when you introduce the extra charges later, they have already spent time and effort which makes them less likely to walk away. But even if they don’t leave, they’ll resent the bait-and-switch nature of this approach.

There are ways to get people to pay a demand-based price without resentment. Indeed, most successful businesses are already doing this, though maybe not consciously, or as well as they could be. I’ll write more about that next time.