Dynamic pricing has been in the news again this week, with Consumer NZ labelling Air New Zealand ticket prices a "rip off". As the New Zealand Herald reported:
Consumer NZ has found that Air New Zealand flights across the Tasman around school holidays increased 43% - almost twice the rate of rival Qantas.
It says it might not be worth flying Air New Zealand to Australia, with evidence that our national carrier is exploiting its market share and demand during the school holidays, giving travellers cause to question if what they’re paying is fair...
A recent Consumer investigation into domestic flights found dynamic pricing could increase the price of the same ticket from Auckland to Dunedin by up to four times as much...
Consumer says while supply and demand do impact dynamic pricing algorithms, “we’re not convinced it’s that simple. We think it’s likely that dynamic pricing allows Air New Zealand to make up profit margins, and it certainly looks like its practices are capitalising on New Zealanders wanting to travel during the school holidays.
“Compared to Qantas, which was consistently cheaper and didn’t have comparable price hikes during either New Zealand or Queensland school holidays, flying with our national carrier to Brisbane looks like a rip off.”
The issue here is the difference in price between a ticket purchased well in advance, and one purchased closer to the date of travel, with the latter being much more expensive. This is an example of price discrimination - selling the same good or service to different consumers for different prices. And price discrimination by airlines is a topic I have posted on before. Here's the explanation I gave then:
Some consumers will buy a ticket close to the date of the flight, while others buy far in advance. That is information the airline can use. If you are buying close to the date of the flight, the airline can assume that you really want to go to that destination on that date, and that few alternatives will satisfy you (maybe you really need to go to Canberra for a meeting that day, or to Christchurch for your aunt's funeral). Your demand will be relatively inelastic, so the airline can increase the mark-up on the ticket price. In contrast, if you buy a long time in advance, you probably have more choice over where you are going, and when. Your demand will be relatively elastic, so the airline will lower the mark-up on the ticket price. This intertemporal price discrimination is why airline ticket prices are low if you buy far in advance.
Similarly, if you buy a return ticket that stretches over a weekend, or a flight that leaves at 10am rather than 6:30am, you are more likely to be a leisure traveller (relatively more elastic demand) than a business traveller (relatively more inelastic demand), and will probably pay a lower price.
The solution is simple. If you want to pay a lower price for an airline ticket, book in advance. That's the advice that Air New Zealand gives in the article:
Customers should book early to secure the best deals, said the (Air New Zealand] spokesperson.
Consumer NZ is of course trying to do the best by consumers. They want lower prices for airline tickets, even when purchased close to the date of travel. However, taking aim at dynamic pricing might be counterproductive. Even putting aside the infeasibility of regulating dynamic pricing, if airlines were to eliminate dynamic pricing, that isn't without cost to travellers.
One thing that an escalating ticket price over time does is manage demand for airline tickets. As price increases, fewer consumers are willing and able to buy tickets. That means that there will generally be more airline tickets available close to the date of travel than there would have been if airline ticket prices remained low all along. Would it be worse to have to pay a high price for an airline ticket purchased at the last minute, or to have no tickets available at all, because the low price encouraged more people to buy, selling out planes sooner? It's not clear to me that is a better outcome.
Even in the case where tickets remain available, a second issue is that it isn't clear that ticket prices would remain low. A profit-maximising airline that no longer price discriminates would set a lower price for tickets purchased close to the date of travel, but a higher price for tickets purchased well in advance. Essentially, they would average the price out over time, meaning that some travellers would end up paying a lower price. That would likely be the leisure travellers, purchasing their tickets well in advance. Business travellers, who are more likely to purchase tickets at the last minute, would benefit greatly from airlines no longer using dynamic pricing.
Consumer NZ is trying to look after the interests of airline travellers (it's not the first time either). However, it isn't clear that they have thought through all of the implications of their attack on dynamic pricing.
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