You didn’t like the blue one?
Eric Boehm, in “Taylor Swift, Junk Fees, and the ‘Happy Meal’ Fallacy,” Reason, October 2023, does a nice job of explaining the case for, in some instances, charging separately for some components of a purchase rather than for bundling.
In his State of the Union address, President Biden discussed the pressing issue of whether airlines should charge an air fare plus extra charges for various special features, or should charge a price for a bundle that doesn’t allow people to choose the individual components. Biden, in his wisdom, proposed the latter and, strangely, claimed that it would save people money. Boehm writes:
Consider the budget airlines that currently offer low fares but charge additional fees for picking seats, bringing bags (sometimes even carry-on luggage), and getting in-flight snacks. If those airlines have to bundle all those costs together for every flyer, passengers who want to travel light, are willing to sit anywhere, and can go 90 minutes without a snack will have to pay more so that other travelers can avoid paying for those things à la carte.
The second group won’t pay less; they’ll just pay it all upfront. Meanwhile, a low-cost option will disappear for the first group. Instead of being able to evaluate tradeoffs—should I save money even if that means I don’t get to sit with my traveling companions?—consumers would face a market with fewer choices.
Well said.
Reading it made me recall an earlier issue on which a life arranger from a different political party, John McCain, proposed forced unbundling. In 2013, he proposed legislation to force cable companies to let people choose specific components separately rather than charging for a bundle.
What do Biden and McCain have in common? They think they know better than the individuals and companies buying and selling and they’re so confident about it that they want (or, in McCain’s case, wanted) to use force to get their way. Whatever we’re doing, according to them, is wrong.
It reminds me of the joke in How to Be a Jewish Mother by Dan Greenburg. (I lost my copy in my 2007 fire and so I’m going by memory here.)
The Jewish mother brings home two nice shirts, one red and one blue, that she gives as a gift to her son. Wanting to please her, he comes down to dinner wearing the red one.
The Jewish mother says: “You didn’t like the blue one?”
This analogy is a little unfair to the Jewish mother: she just complained and didn’t use force.
READER COMMENTS
MarkW
Sep 29 2023 at 10:33am
As HL Mencken put it
<i>The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.</i>
Casting large businesses as hobgoblins is an irresistible temptation for politicians. Whatever it is they are doing now, they surely must be doing it in order to take advantage of ordinary folks — so government must step in and make them stop doing it — for the good of us all.
Thomas L Hutcheson
Sep 30 2023 at 8:30am
I agree. But is not the sensible thing to do to trim the tree branch whose knocking against the window pane gives rise to hobgoblin panic? And not create other even more outlandish hobgoblins like “replacement” “climate change hoax” and “socialism?”
Richard W Fulmer
Sep 29 2023 at 10:44am
Like President Biden and Bernie Sanders, George Fitzhugh, a proponent of slavery, also believed that Americans are faced with too many choices and decisions. In his 1854 book, Sociology for the South, or the Failure of Free Society, Fitzhugh argued:
nobody.really
Sep 29 2023 at 11:12am
Delightful post–especially the juxtaposition of Biden and McCain’s policy prescriptions.
That said….
Is this accurate? I would surprise me to learn that there would be NO economies of scale from standardizing operations, NO benefits to streamlining. True, sometimes you can get symbiotic results from producing two products at once (e.g., producing both beef and leather), but it’s not obvious that this airline example would provide this symbiosis. And if there were such benefits from streamlining, I’d expect competitive pressures to result in them being passed on to consumers—so people who desire flexibility would be made worse off, but people who liked the standard offer would be made better off. Just spit-balling here.
In addition, I suspect that imposing an incremental charge for checked bags but not carry-on bags has led to an artificial preference for carry-on luggage, which arguably creates externalities for other passengers. Eliminating that charge would, I expect, reduce the externality. (However, it might somewhat increase burdens on people waiting at the baggage carousel—but those strike me as smaller burdens.) I expect that assessing an equal fee for carry-on bags mitigates this problem.
steve
Sep 29 2023 at 11:47am
There are usually some cost savings from uniformity but the prices speak for themselves. Budget flights are cheaper if you dont need stuff like carry on bags or luggage. I think the larger issue is that these airlines are sometimes guilty of hiding or minimizing the fact that you may need to pay extra for stuff that is standard on other airlines. Consumers arent always well informed.
Steve
Richard W Fulmer
Sep 29 2023 at 12:08pm
News of shady corporate dealing quickly makes its way to the Internet. But even if many passengers choose not to inform themselves, taking away their options will not necessarily make them better off. Instead, it will far more likely make things worse. Good intentions do not ensure good results.
steve
Sep 29 2023 at 3:35pm
I didnt suggest taking it away, noting those flights really are cheaper for many people. Just out of curiosity, what would be the downside to requiring that airlines make their extra fees more transparent? I know it’s hard to believe but not everyone spends time on the internet.
Steve
MarkW
Sep 29 2023 at 11:55am
In addition, I suspect that imposing an incremental charge for checked bags but not carry-on bags has led to an artificial preference for carry-on luggage
The budget airlines charge for both checked AND carry-on bags (apart from one very small purse-sized bag–and they’re very strict about it). Baggage charges for both types of bag also vary depending upon whether the passenger pays for the bag when booking the ticket or at the counter (it’s more if they wait). It’s amazing how companies who are in the business of operating budget airlines do actually somehow consider these various permutations. One might imagine that they may hire some experts to help them get the balance between all these different fees right (and also adjust them as necessary based on experience).
nobody.really
Sep 29 2023 at 12:11pm
Ah, yes: Experts that help get the balance right–and then who must adjust them based on experience. It’s almost as if you are acknowledging that experts don’t always get things right.
Almost.
MarkW
Sep 29 2023 at 6:06pm
I don’t imagine experts are always right (who does?), but even so, it’s often a very good idea to consult them. I do think it’s pretty rare though that armchair commenters who have never spent any time in an industry are going to identify issues and efficiencies that have never occurred to those whose livelihood depends on it.
Dylan
Sep 30 2023 at 4:38pm
I think this is a very good point, and one that tends to get overlooked when people complain about the revolving door between regulators and the ones they are regulating. I agree that this can lead to too cozy relationships and regulatory capture, but what is the alternative? Having people regulate who know absolutely nothing about the industry they are regulating?
Monte
Sep 29 2023 at 12:21pm
It’s fascinating, isn’t it, to witness the change in candidates once elected. It’s as if they undergo some bizarre mutation in their thinking, similar to what mere mortals in the realm of Marvel comics experience in order to become superheroes. Like the comic book character, Slapstick, they seem to pass through a portal that stretches their molecules across multiple dimensions making them immune to common sense and reason and instilling in them the fatal conceit that they are able to shape the world around them according to their wishes.
nobody.really
Sep 29 2023 at 12:54pm
Alternatively (and with an acknowledgement to MarkW above), perhaps politicians are less foolish than we think, and are instead experts in their own line of work.
Perhaps politicians want to attract the attention and support of voters. Like other entrepreneurs, perhaps they field-test a variety of products, and they publicly roll out those that tested well in focus groups of people in important demographics–say, suburban moms in Philadelphia. Politicians don’t necessarily buy their own products; they might simply believe that WE will buy them (where “we” refers to the suburban moms, etc.).
By openly espousing counterfactual and anti-social positions that conflict with the prejudices of the educated elite–and then winning–Donald Trump has helped a broader class of people appreciate the myth of the rational voter.
I have elsewhere argued that competitive dynamics drive people to do things they disfavor. Politics is competitive. Given the circumstances in which they operate, can we blame politicians for pandering?
Yes. Our blame may or may not be fair, but our umbrage against pandering may discourage the practice at the margin. Fairness may be beside the point.
Monte
Sep 29 2023 at 1:17pm
Perhaps. Or maybe we can attribute their behavior once elected to that of the victims in Star Trek who become assimilated into the collective hive mind of the Borg.
MarkW
Sep 29 2023 at 6:10pm
Yes, politicians (and political consultants) are experts in the art of getting re-elected That’s Public Choice for you.
Thomas L Hutcheson
Sep 29 2023 at 1:35pm
I’d say there are 4 possibilities
McCain was right and Biden is wrong.
McCain was wrong and Biden is right.
Both were/are wrong.
Both were/are right.
Which of these is the case would require economic analysis.
robc
Sep 29 2023 at 5:30pm
Or philosophical analysis.
I think its a moral question, not an economic one. And the answer is that both are wrong.
Thomas L Hutcheson
Sep 30 2023 at 8:37am
You have hit on a very fundamental point of my disagreement with most Libertarians. I do not think policy questions can be resolved with philosophy alone.
Jose Pablo
Oct 2 2023 at 11:06pm
What you don’t seem to realize is that the “economic analysis” you are asking for is, in itself, a form of philosophy as all interpersonal comparisons of utility are.
Philo
Sep 29 2023 at 2:08pm
Upper-class/middle-class people tend to look with disapproval on poor people’s lifestyles, so they outlaw cheap/crummy (low-paying) jobs, cheap/crummy housing, cheap/crummy airplane rides, without bothering to ensure that equal or better alternativeswill be available. (And with the airplane rides, if a middle-class person were on the same flight he would be annoyed at being nickeled-and-dimed for the ordinary amenities that the poor people are willing to forego.) The guiding thought is: “Everything should be high-(or at least medium-)quality—i.e., the way *we* would want it. Let’s pass a law!”
Thomas Hutcheson
Sep 30 2023 at 8:42am
I agree and the worst manifestations are in building codes and NIMBY-ist land use regulation. [Although there some of the disapproval is of “luxury” lifestyles.]
Henri Hein
Sep 29 2023 at 3:42pm
I wholeheartedly agree with your point, but I personally detest the low-cost airlines. It’s not just the inconvenience of the lower services, it’s that fees being incurred at different times introduces an annoying opaqueness. For instance, I got surprised at having to pay a fee to have my boarding pass printed. I don’t remember the other annoyances, but the point is I have to collect all the receipts for all the various fees and manually compute if I actually saved any money in the end. I still think the bargain hunters win out, because they will just pick the cheapest option all the way through and when you do that, you do most likely save money. For me, it’s not worth it over picking all the options up front and smooth out the actual flight, which is annoying enough even in the best of circumstances.
Jose Pablo
Oct 2 2023 at 10:44pm
You are totally right!
but the point is I have to collect all the receipts for all the various fees and manually compute if I actually saved any money in the end
The problem is that this comparison should be done at a point at which knowing all the fees you are going to pay is almost impossible. Low cost companies use a headline price to make you choose them over other companies and then kind of force feed you with as many extras as they can think off. To the point that you never know how much you are going to end paying.
It is all a great exercise in opaqueness … but I very much doubt that the solution is charging you a much higher completely transparent price, as Biden seems to want.
Andrew_FL
Sep 29 2023 at 6:35pm
Ironically the market has sort of provided what McCain wanted. Streaming services offer entertainment content that’s not exactly a la carte, but is separated by different companies based on what IP they own. If you only want one streaming service it is cheaper than cable, but the more services you subscribe to the closer you get to the same price you would’ve paid for a cable bundle.
Dylan
Sep 30 2023 at 4:47pm
The biggest benefit is that sports got stripped out of the bundle, so it made the reconstituted bundle far cheaper for non-sports fans than it used to be.
Jose Pablo
Oct 2 2023 at 10:56pm
It took thousands of years for humans to put together wheels and suitcases (and it took us at least two interactions to come up with the idea of using four wheels … we started with two!!).
But what a great invention this was!
Now, the low cost companies pricing model is causing most of us getting back to using “luggage without wheels”, this time in the form of backpacks.
It breaks my heart (and my back) to see such a great invention being thrown down the toilet!
Jose Pablo
Oct 2 2023 at 11:01pm
I am not sure I am pricing my back pains correctly when deciding not to pay for the carry-on.
Sure Biden is going to help me to better price my herniated discs.
Dick King
Oct 6 2023 at 8:42pm
The purpose of optional amenity fees is price discrimination AKA market segmentation. Looser wallets pay more. This is described in any economics textbook. The classic example is movie theater popcorn.
Biden wants to kill market segmentation because its more of a thing with budget airlines, which tend to not be unionized and therefore their workers tend not to have a significant part of their wages flowed to the union fees and then to the Democratic Party.
-dk
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