1x34: Hidden Cities

Hi all! Iā€™m a longtime LugRadio/Bad Voltage listener, finally jumping into the community pool, so go easy on me.

I just wanted to comment on the hidden cities airline pricing. Such pricing is certainly counter-intuitive (I found it startling when I first encountered it), but not an accident or mistake. To make up an example, American Airlines may well benefit from charging more to fly from, say, Kansas City direct to Chicago, versus Kansas City to Cincinatti via Chicago.

The reason is airlines like American have more market power at their hubs (like American at Chicago) than at the spokes (like Cincinatti). So the discounts on spoke flights are effectively price discrimination between people flying to versus through the hubs. Spokes travelers are willing to pay less (since they have easy outside options) while hub travelers are willing to pay more. Hidden city pricing lets airlines get the spokes without having to give discounts at the hubs.

What if everyone started using Skiplagged? (Ignore the baggage checking issue for simplicity.) Airlines could no longer price discriminate in this way, so in order to charge hub travelers more they must give up some business at the spokes. Thus, the hub prices drop and the spoke prices increase, which has the following consequences on the well-being of those involved:

  1. Hub travelers win.
  2. Spoke travelers lose, and may fly less.
  3. The airline loses, and it can lose more than travelers gain overall.

Thereā€™s actually a nice paper on this with a formal model showing this result, even going further to show that consumers by themselves may lose more on the whole. I also found a blog post with a good informal discussion of this (though Iā€™m not sure I agree with the ā€œgame theory pointā€ at the end) if people are interested.

Bottom line: yes, the airlines are upset about customers exploiting hidden city pricing because it hurts them, but it may also be that society is hurt overall as well. Even if you donā€™t care about the airlinesā€™ well-being, the paper suggests the consumers themselves may be worse off, surprising as it is. Whether or not this lawsuit is justified (I think the ā€œsecurity argumentā€ airlines are making is flimsy), Skiplagged may be a bad thing for society, even if itā€™s good for people living in Chicago.

Huh. Thatā€™s really interesting. Did not know this; thank you!

Half the problem here is that the airlines arenā€™t honest about this sort of thing, I think; they wave their hands and talk about security and attempt to paint people as villains and start litigation, and because they are the boy who cried wolf on this sort of thing then nobody believes that itā€™s a real problem.

That bonus prediction of mine is seeming more likely now:

The Nasdaq hit an all-time high this morning.

http://americasmarkets.usatoday.com/2015/04/23/nasdaq-briefly-tops-2000-record-close-of-5048-62/

ā€“jeremy

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Hey @jonobacon, Any updates on the Logitech remote? Anything that would have changed your opinion as you have used it for a while now? Thinking of getting one myself.