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

[oblomov]

Is Reich unfamiliar with the concept of bid and ask being distinct prices?

[HiTech RedNeck]

I guess he could also say the screamingly high price made it possible for a rich fellow like him to get a ticket and shut out the rabble who couldn’t pony up the money.

It’s up to the airline what to do. People do not always react totally logically to astounding price run-ups in disaster situations, and are known to hold grudges, and share stories that engender grudges, that a vendor might not want. For public relations sake the airline might have had a lottery for the last few seats, if tariffs permitted (which is a whole nother story). But nobody can, or ought to be able to, force them to if they don’t so choose.

[MEGoody]

Sorry, I’m failing to be appalled at Reich’s speaking fees, but I am appalled at the airlines profiteering on people’s desparate efforts to get out or get home. The two situations are hardly comparable.

[ClearCase_guy]

Supply and Demand.
Free Enterprise.
The Market System.

Folk who don’t like the concepts above like to use the term “price gouging” instead.
As a Conservative, I do not use the term “price gouging”.

[HiTech RedNeck]

Given that the storm rendered all travel paralyzed, those people who couldn’t get seats because there were too few to go around were going to be looking at delays anyhow. Other possibilities existed for many, such as driving a rental car or taking a bus or taxi to an operative airport. Airlines were fully refunding all canceled-flight tickets.

[Tublecane]

How dare airlines make a profit by fulfilling a need! How dare they ration supply in a time of high demand by changing the price! Whoever heard of such a thing? Why, it’s almost as if they were tryong to maximize satisfaction at both ends. Everyone knows they should maximize the satisfaction of one passenger—whoever happens to be eriting an article later—at the expense of everyone else.

If you think it’s “unfair” or “exploitative” blame God or nature. The airline didn’t make the weather. Otherwise, assuage your sense of justice by not buying a ticket. On the bright side this is refreshingly frank. If only they’d always admit they prefer some undefined state of fairness to efficiency. Usually they pretend their policies are more efficient in addition to following some novel form of fairness.

[Straight Vermonter]

People say the same thing about stores jacking up prices on bread, water, batteries, etc before a storm. The result is that these items are sold at their usual price and are wiped out by the first few people who show up. If they were sold based on market value, then people would have to consider how many gallons of water at they REALLY need before they load 20 of them into their shopping cart.

[9YearLurker]

This is the usual argument against ‘price gouging’ in times of disaster. But of course the more prices are gouged, the more incentive there will be to get the scarce product or service to those in need despite the adversarial circumstances.

[HiTech RedNeck]

Given that due to security regulations it’s no longer possible to resell a personally unused ticket (though the airline might refund part or all of it) it’s not like hoarding tickets would happen. So it’s a little different than passing out so many bottles of water. All the seats will get used by people who need them (who is going to joyride in such a situation?), and a lottery might make sense for public relations purposes. People liken capitalism to gravity as equally inexorable forces, and it’s true insofar as it goes, but we also note that gravity does not mean we are condemned to do nothing but lie upon the ground all our lives.

[HiTech RedNeck]

People react as people react. It’s up to the airline to choose what to do for the sake of its perceived appearance or its financial condition or for the sake of whatever flower is blooming in Japan right now for that matter. I’m not even sure Reich is asking that anybody force the airline, he’s only commenting about how it looks. He might be feeling a bit guilty about being rich enough to get the ticket and thus shutting out poorer people.

[Tublecane]

The two situations are perfectly comparable. But nevermind. What specifically “appalls” you about “profiteering” on people’s desperation? Doesn’t the very fact that they are desperate, in your words, prove the market price is higher? If you kept prices the same despite customer’s desperation wouldn’t you increase the likelihood that less desperate people would gobble up the tickets of more? Yes, absolutely, especially if they were rich.

What do you want, exactly? For the airline to ration seats but not profit from it? How? By donating seats to make up the difference between normal and hurricane profits? Why? Wouldn’t that just be the winners exploiting all remaining desperate people? Why’s it okay for them but not the airline? Or is it for PR purposes? I can understand why that’s necessary, given the delusions of people like you over the phantom distinction between profiting and “profiteering.”

[Tublecane]

Logically they should say the same thing about bread, water, etc. all the time. Did you know you’ll die in a month or so without food? Grocery stores profit off of this fact. They charge a price for your life!!!

[Tublecane]

Hoarding wouldn’t happen, but you’d still be able to price out the less from more desperate.

As for the lottery, really it’d be like a stupidity tax on the airline. It wouldn’t make for a better functioning economy, just a means of assuaging a misguided morality based on ignorance.

[Tublecane]

Okay, so it looks bad to you and Robert Reich. I’m setting both of you straight. Your beef is with nature, not the airline. Life is unfair, not profits (or “profiteering”).

[TChris]

I am appalled at the airlines profiteering on people’s desparate efforts to get out or get home

Since the airlines had a limited number of seats left, how would you have chosen who gets a seat?

[ZOOKER]

What about the flight before?

Waiting 'til the last minute can be very expensive, whether it's buying airline tickets, hotel reservations, concert tickets, etc. The storm just magnified this truth.

The law of supply and demand is simple, how does Reich not know about it?

[MEGoody]

What specifically “appalls” you about “profiteering” on people’s desperation?

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.

Doesn’t the very fact that they are desperate, in your words, prove the market price is higher?

Of course I believe the market should dictate the price of things. But in disaster situations, taking advantage of people's desparation is simply immoral. If the airlines always made the profit margin they made on these seats, then so be it. But to jack up the price so significantly during a crisis is plain wrong.

What do you want, exactly?

I'd like to see people in the United States have better morals.

For the airline to ration seats but not profit from it?

Oh, please. The airlines were profiting at their normal prices. As to "allocating" the seats, they should have handled it like always - the seat goes to the first one to purchase it.

Wouldn’t that just be the winners exploiting all remaining desperate people?

I have no idea what "winners" you are talking about. If you are refering to the people who purchased a ticket before the seats were sold out, that is nothing new, and it is not exploitive.

I can understand why that’s necessary, given the delusions of people like you over the phantom distinction between profiting and “profiteering.”

So taking advantage of desperate people in a natural disaster situation is simply "making a profit" to you. Good grief.

[HIDEK6]

Market-based pricing is the most effective means of allocating scarce resources.

If you could get out for $300, you'd have a mess.

[MEGoody]

The result is that these items are sold at their usual price and are wiped out by the first few people who show up.

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

If you are truly concerned about the food and water supplies getting spread around appropriately, a rationing system makes more sense. Someone can still come in and buy it all up. Jacking up the price dosn't stop that - it just changes who has the resources to do it.

If the airline had raise the price from (for example) $400 per ticket to $450, it wouldn't have been a huge deal in my view. But to jack it up to $4,000 is appalling - and immoral in my view.