I recently talked about a Southwest Airlines policy regarding passengers who require the use of more than one seat, and how it provided a good opportunity to visit one of David Henderson’s Ten Pillars of Economic Wisdom – there ain’t no such thing as a free lunch. But it also occurred to me there’s another item on the list that’s relevant to these kinds of seating policies. One might think that a person who uses two seats should pay for two seats, because they are using twice as many resource units as a person who only occupies one seat. But understanding another pillar of economic wisdom reveals a somewhat more subtle take.
The third pillar is “Economic thinking is thinking on the margin.” For example, in the perfect competition model, we say that the price of a widget will be equal to its marginal cost. The marginal cost of a widget is how much it would cost the company to produce one more widget. Thinking on the margin means thinking about things in terms of the next available unit. Adam Smith was puzzled by the fact that something essential like water was inexpensive but something frivolous like diamonds could be very expensive indeed. The so-called diamond-water paradox is explained by thinking on the margin:
In my original post, I mentioned that part of the cost of occupying two seats is the opportunity cost – by taking up two seats, you are preventing someone else who had travel plans from having a seat as well. And I mentioned that aside from Southwest, the general policy is for people who occupy two seats to pay for two seats. But there is an additional factor I didn’t talk about.
With these airlines, the policy also states that if the flight was anything other than full when the plane takes off, then the passenger who had to buy two tickets will be refunded for the cost of the second ticket. And thinking on the margin, this makes sense. If the flight was full, then the second seat this passenger used could have been a seat that was available for another traveler. In this case, the passenger using two seats displaces the travel opportunity of another potential passenger and costs the airline the opportunity to sell another ticket, so the marginal value of that second seat is one seat. But if there is even a single empty seat on the plane, the margins change. In this case, occupying that second seat didn’t displace a potential traveler, because the marginal potential traveler could have taken the empty seat instead. And when this is the case, the airline will retroactively reprice the second ticket as being equal to its marginal cost – that is, by refunding the second ticket, they retroactively change the price of the second ticket to zero.
So it’s not quite the case that a person who uses two units of a resource should pay twice the price of a person who uses one unit. Thinking on the margin leads to a slightly more nuanced take. Instead, the idea is that someone who uses an additional unit of a good should also pay the marginal cost of the second unit. Often, the marginal cost of the second airplane seat is a second airplane ticket. But, sometimes the marginal cost of the second seat turns out to be zero, and when that is the case, most airlines do in fact set the price of the second seat to be equal to its marginal cost.
READER COMMENTS
Henry
Dec 27 2023 at 10:41am
I still think there’s a free lunch in there.
When the plane is empty the marginal cost for a heavier passenger is not zero but the cost of the necessary additional fuel which is paid by all lighter than average passengers to all heavier than average passengers.
When seats are not constrained the relevant consumption variable is units of weight.
Jon Murphy
Dec 27 2023 at 11:42am
There isn’t a free lunch (as you note there is still a cost). But given the airline’s freely chosen policy is to refund the price of the ticket, then it indicates the relevant margin is still the price of the seat, not weight.
Matthias
Dec 30 2023 at 8:10pm
We can’t make that inference.
Eg airlines also don’t let economy class passengers move into business class, if there are seats available. Even though that would also be free (assuming they keep getting the economy class meals and service only.)
To go even more extreme: once written, software is essentially free to copy (and so are books and videos etc). Yet companies still charge people by the copy.
Jon Murphy
Dec 30 2023 at 8:13pm
Yes, we can. In fact, it is the only inference we can make without more data.
Vivian Darkbloom
Dec 27 2023 at 11:56am
I’ll remember this lesson the next time I invite family members to fly with me. If the plane isn’t full, I’ll show the airline management those Ten Pillars and ask for a refund of the cost of those additional seats because the marginal cost to the airline for them to accompany me was (nearly) zero! I wonder how persuasive that argument would be? I suspect the answer would be to do a reverse Orwell: “two legs good, four legs bad”!
David Seltzer
Dec 29 2023 at 4:19pm
Vivian, you make a an interesting point. Some years ago, Midway Airlines was a discount carrier, now defunct. My partner in NYC called and asked if I could be there the next day for an important meeting with clients. I lived in Chicago. I called Midway to secure a next day flight. The ticket was $800. I asked the reservationist how full the flight was. 20%. I offered $400 for the ticket or nothing. She said she could not accommodate me, the price is $800. I refused and rang off. I was able to delay the meeting to the following week. The price of the round trip to NYC on a competing carrier was $150.
James
Dec 27 2023 at 5:59pm
The amount of fuel required to complete a trip (including a reserve) is determined by many things including the total weight of the aircraft, fuel, passengers, crew and freight as well as weather, traffic and possible delays. Adding one passenger will require more fuel to complete the flight. Adding one passenger may, in some cases, reduce the amount of freight carried. A “large” passenger would increase the fuel required to complete the flight.
Comments are closed.