Robert Reich objects when airlines use market-based pricing, but maximizes own profits

AEI ^ | 10/31/2012 | Mark Perry

[SeekAndFind]

Robert Reich was relieved that he was a passenger on one of the last flights to leave NYC before the airports closed on Monday. But he’s upset that the airline had “jacked up” ticket prices to $4,000 for the last flights leaving NYC for California. Even at $4,000 per ticket, the flight was oversold by 47 passengers, and the airline then paid 47 volunteers $400 each to take a later flight, “whenever that might be.” In his own words, Professor Reich explains:

Assuming that the 47 extra passengers had each paid $4,000 to get onto the plane at the last minute, and the 47 who gave up their seats for them received $400 in return, the trade would have been “rational” in narrow market terms. After all, the seats were “worth” $4,000 to those who bought them at the last minute, and switching to the next flight (whenever that might be) was “worth” $400 to those who agreed to do so.

But the transaction was also deeply exploitative. The airline netted a huge profit because of the impending storm.

I couldn’t help think this was a miniature version of the America we’ll have if Mitt Romney is elected president. Rational and efficient in terms of supply and demand, guaranteed to maximize profits, but fundamentally unfair.

MP: Here’s what I find exploitative and fundamentally unfair: Robert Reich’s speaking fee is $37,500 to $100,000 according to the website below, and he therefore is able to net huge personal profits for his 30-minute talks.

OK, actually, I think it’s great that Professor Reich uses market-based pricing for his speeches, and I applaud him that he can apparently charge speaking fees as high as $100,000 based on demand, but then he really shouldn’t complain when an airline uses market-based pricing to allocate scarce seats on a plane when demand is high during a natural disaster.

And if Reich thinks that the market for giving speeches is an example of a market that is “guaranteed to maximize his profits” as a supplier of speeches, but is “fundamentally unfair,” because his prices and profits are so high, then I would challenge him to reduce his speaking fees significantly to a much lower, and much more “fair price.”

HT: Dean Harrington

[TXnMA]

I had the unfortunate experience of being stuck for half an hour with Reich in the foyer of a venue while we waited for the guy with the key to arrive.

Believe me, after listening to 30 minutes of Reich's socialist blather -- up close and personal -- I would gladly buy a plane ticket to Podunk to escape having to listen to him speak!

[MEGoody]

Folk who don’t like the concepts above like to use the term “price gouging” instead.

There is a big difference between day to day situations and a natural disaster. If someone was willing to pay $4,000 for a plane ticket on a normal day, that's up to them. But when the airline "price gouges" to take advantage of people in a desparate situation - that's immoral in my view.

[HIDEK6]

I think it is wrong to jack up the price of something just because people are desperate for it due to a disaster.

They are not jacking up the price because people are desperate, they are determining a price that, if met, will compensate them for being able to offer a service that no one else can offer.

It will encourage other suppliers to do the same.

[Straight Vermonter]

Those things get wiped out anyway. Didn't you see the pictures of the stores before Sandy?

Yes, because "price gouging" is illegal.

[downtownconservative]

You need to think through to the logical conclusion of your point. If you believe in the free market system, market based pricing is the only logical approach. If you want the government to regulate the market in order to make it more humanistic (and might I add, capricious), then you do not believe in the value of the free market and capitalism.

If the government gets to decide what is reasonable profit, Katy-bar-the-door. Free people get to decide what is reasonable based on their own pocketbook and over-pricing is eventually curbed by loss of demand.

If the folks who agreed to pay $4000 for their tickets out of town didn’t want to have to pay so much, they should have made plans in advance of the approaching storm. That mistake cost them.

Under the system you seem to espouse (with government intrusion), the airline would have been forced to prioritize the assignment of the available seats by interviewing each of the passengers in order to ascertain their need for travel and assign each based on the subsequent numerical score. Or maybe a lottery system should be set up, just to be fair, in these situations.

No, airlines operate on very low profit margins. Airlines lost millions of dollars due to flight cancellations, diversions and equipment grounded (and therefore accruing costs but zero revenue) during this storm. Don’t begrudge them just a tiny bit of revenue recovery.

[kevkrom]

I think it is wrong to jack up the price of something just because people are desparate for it due to a disaster. I'd feel the same way about someone charging $50 for a bottle of water when there was no other way to get water, or lumber increasing in price 50x immediately before or after a hurricane when people are desparately trying to protect their homes or at least what is left of them.

Read Walter Williams on "price gouging".

[FoxInSocks]

lumber increasing in price 50x immediately before or after a hurricane when people are desparately trying to protect their homes or at least what is left of them.

That's a perfect example of why prices fluctuate in free markets. If the price of lumber didn't increase, a few people could buy up all the available lumber in a local market without concern for waste. Price changes in such circumstances are not so much for profit, but to allocate scarce resources.

Someone could go out and buy 200 flashlights. If the price of flashlights rose in times of emergency, maybe that person buys only 3, which leaves 197 available for others.

Or hotel rooms. Maybe a family of six would like six hotel rooms, but with increased prices they share one or two rooms. The hotel can then take in a lot more people.

Read Thomas Sowell's book on economics -- the beginning is all about scarcity of resources and how to best distribute them. There are different economic theories, and a popular one in the United States is a free market.

[Tublecane]

So you think economic laws should be suspended in times of “desperation” and “disaster.” Leave aside for the moment who defines what’s a disaster and the fact that I think we’ve officially been in an emergency as a nation since 1933 to justify government saving us from the evil market. You don’t seem to realize how it would hurt the desperate fir prices to take no cognizance of supply and demand in time of disaster. I don’t think I can explain it, except to say that there’s no reason why, for instance, airlines should suddenly become charities because of desperation. That’s merely a redistribution of suffering.

You think the market should dictate prices, just not during a disaster. Well, I say that’s immoral because it’s all the more important for markets to be free when need is most acute.

Better morals to you sounds like stupider morals to me. I do not worship the god Efficiency. For instance you should not be able to hire a murderers just because you’re willing to lay. But for the things we should be allowed to buy, I recognize no moral principle restricting what sellers can charge. Buyers can take it or leave it, and if they’re willing to pay that is the market price. Yes, even in a time of disaster. Especially in times of disaster.

“The airlines were profiting at their normal prices”

Not to profit from rationing seats according to the market conditions at the time, obviously I meant. Which means by charging a higher price and thereby profiting more. You wouldn’t want them to do that, though, which means you don’t want them to ration. You may not realize it, but that’s exactly the outcome of your supposedly moral stance in favor of customers. You would virtually guarantee less desperate people would crowd out more desperate.

“As to ‘allocating’ the seats, they should gave handled it like always—the seat goes to the first one to purchase it.”

Okay, so you’re not a lottery advocate like some.

The “winners” are the ones who won the lottery, should there have been one.

Yes, taking advantage of people is making a profit. That’s what businesses exist for: to take advantage of need. Airlines jack prices up during disasters to take advantage of demand just like the grocery store takes advantage of your wanting to eat. This doesn’t suddenly become a bad thing just because you really, really want it instead of wanting it.

[MEGoody]

Under the system you seem to espouse (with government intrusion)

I'm not espousing government intrusion.

If the folks who agreed to pay $4000 for their tickets out of town didn’t want to have to pay so much, they should have made plans in advance of the approaching storm.

Some could, some couldn't.

That mistake cost them.

This statement makes me wonder if there were any who couldn't afford the $4,000 were injured or killed during the storm. We'll probably never know.

Airlines lost millions of dollars due to flight cancellations, diversions and equipment grounded (and therefore accruing costs but zero revenue) during this storm.

I don't know this for a fact, but I'd be willing to bet the airlines have insurance to cover these types of situations.

Don’t begrudge them just a tiny bit of revenue recovery.

I "begrudge" anyone benfitting from immoral behavior.

[Tublecane]

“They are not hacking up the price because people are desperate”

Oh, let them have their little word. “Desperation” equals higher demand. So the more desperate customers are the higher prices go, and the best way to allocate scarce resources in times of desperation is freely floating prices, like always.

You could call the a mother’s love for her children dependency and the children’s receiving her care exploitation on their part, or a $150 million contract to play baseball wage slavery. A ything can be whatever you say it is so long as people assent to it. But that doesn’t touch the morality of the situation. If children exploit their parents or being a millionaire is being a slave then exploitation and slavery are good. If charging higher prices for plane tickets during disasters is profiteering off people’s desperation, then making money off desperation is a good thing.

I actually believe that last part. Thank God people can make money off desperation. It’s so much better that they can than that they bake money off lesser need.

[statered]

Oh please. You are completely deluded. It is actually immoral NOT to jack up prices. The rise in prices guarantees a wider distribution to those who have the greatest utility for the product.

Keeping prices low encourages hoarding and results in less product being available.

Please spare us from your inflated sense of moral superiority lololol

[Tublecane]

“This statement makes me wonder if there were any who couldn’t afford the $4,000 were injured or killed during the storm”

Is that idle curiosity, or do you think it’s germane to your point. Be aide if the price weren’t raised it’s simply be another group of people left behind: instead of those who couldn’t afford $4,000 it’d be those who behind in line. Are you trying to tell me there’s some moral principle which holds that the latter deserve their fate but not the former?

[Tublecane]

“I’m not espousing government intrusion”

Okay, but all arguments against government intrusion hold equally against your spurious morality.

[Boogieman]

“I couldn’t help think this was a miniature version of the America we’ll have if Mitt Romney is elected president.”

Well, shouldn’t Mr. Reich be happy about a miniature version of America, where he can finally reach the top shelves in refrigerators?

Also, if the prices were too steep for him, perhaps Mr. Reich could have negotiated with the airline for a better price, if they stowed him in the overhead compartment.

[Boogieman]

Oh no, the airlines charged more because there was unprecedented demand? Cry me a river!

Listen, unless you give the airlines some moral credit when they are forced to lower prices because of low demand, then you have no standing to assign them moral blame when they raise prices due to high demand. Otherwise, you’re just being a hypocrite.

Even if you were consistent about it, it would still be supremely silly to make moral judgements based on entities acting according to the natural laws of economics, just like it is silly to make moral judgements based on animals following their instincts.

[Onelifetogive]

or lumber increasing in price 50x immediately before or after a hurricane when people are desparately trying to protect their homes

Would you load up a truck with lumber, drive all night into the path of a hurricane to deliver lumber to people "desperate" to save their homes if you stand the change of getting arrested for "price gouging?" And yet, that is EXACTLY what people "desperate" to save their homes need people to do.

[Onelifetogive]

appalled at the airlines profiteering on people’s desparate efforts to get out

You must HATE auctions where one person is allowed to bid the price of an item beyond what any other person wants to pay!

[gundog]

Just pissed because they always ask him if he’s flying unattended.

[downtownconservative]

Immoral is a word that has a broad meaning depending on who is using it. At what point does market based pricing become "price gouging"? Let's appoint a panel and decide a maximum range of profit margin beyond which we can exert our moral superiority and point fingers at people who provide services or product and scream at them and call them "profiteers"./s/

Your argument is seriously flawed unless you become much more specific. And at that point, you become a progressive liberal.

[HiTech RedNeck]

It’s a tax on the airline only if somebody else enforces it. Otherwise it’s a public relations investment.