a better way to buy and sell airline tickets?
If you've ever used farecast.com, then you've probably experienced a little wonder at how major airlines choose to price their tickets. Sometimes, as you walk down a jetway built in the 60's to board a plane that feels like it was built at least 20 years ago, you kind of have to wonder how airlines seemed to have missed the capitalism boat. I wonder if price fixing could actually harm an industry?
As an analogy, we could think of an ecosystem in which a single predator eats more than his/her share of the prey to spite competing predators. But in the ensuing system, the entire species of predator without competition thrives -- there is little basis for natural selection, and the usual advantages of evolution are lost. By eliminating the competition, the predator becomes lazy and less competent without the filtering of survival of the fittest.
What can we prey do to improve our lazy incompetent predators? (Actually, this idea also hopes to improve things for both parties.)
How about: airlines could sell tickets ahead of time for half their desired price, allow tickets to be resellable through a centralized system, and then collect half of the final customer's price when that customer boards the plane.
Here is a quick example: Awesome Airlines sells Barbara a ticket from NYC to LA on a certain date and time for $200. Barbara is now free to re-sell the ticket as she sees fit. Demand for tickets goes up, and Barbara sells to Carl for $300. Demand goes way up, and Carl, who did want to fly to LA, decides he's better off flying later, and agrees to sell for $400 to Darlita. Darlita is the final customer, and before she boards, she pays Awesome Airlines another $400, so her final effective price is $800. In this case, Awesome Air got $600 for the flight, while Barbara and Carl each made $100. You could argue that Darlita got hosed, but in the current system it is more likely that either she would have had no way of getting on that flight at all (if the tickets were sold out), or that the airline would then be asking for $1000/ticket since it had anticipated high demand -- a price too dear for Darlita.
We could also imagine that demand goes down after Barbara buys her ticket for $200, in which case she can cut her losses by selling for $100 to Ebert. In this case, Barbara's misplaced hope that the demand would go up cost her $100. The airline still collected $300 for that ticket despite their misjudgment of hoping to get $400 for it, and Ebert was able to fly despite his unwillingness to pay $400.
Exactly why is this system any better? Primarily, it avoids the hassle (for both the airline and customer) of having to guess where the best price is, while at the same time hedging the risk for the airline by encouraging that they usually earn at least 50% of their desired revenue for every flight.
It is good for customers because customers won't get screwed by high prices when there is really not much demand. If there is high demand, then prices may temporarily go up, but ultimately, airlines will naturally move to fill in the flights of higher demand, so that supply and demand stabilize and prices will come back down.
It is good for airlines because (1) they are more likely to always sell at least half of their desired ticket prices, and (2) they can get much more money where there is high demand. In addition, they get much more direct feedback about where the financial demand lies for certain flights.
I can imagine one objection being that purchasing flights now is somewhat convenient (I really think it could be a lot better, though!) but it may seem to be much less convenient if you need to go and find a random person from whom to negotiate your price.
Aha! But I think, if the system is well-designed, purchasing tickets would actually become easier! Why? Think of a large stock exchange system -- trades are effectively made between a plethora of owners at lightning speed. Because the trading is centralized and well-organized, there need be no concern about finding a seller or face-to-face negotiations. In addition, it becomes much more reasonable to book flights which include a layover, since we can now very reasonably work with completely unassociated airlines in choosing a multi-flight trip.
Unfortunately, I doubt this would happen. Some people would be concerned about the security risks of knowing who is buying tickets in the resell system, although this could certainly be handled as well as the current system. Airlines would be concerned about the increased financial risk, although in the long run it is actually reduced risk for any half-decent airline. Finally, it would probably require some legislative support, which means some popular support, and that seems extremely unlikely as long as any single powerful airline or politician is against it.
In any case, it's still a cool system, and we could apply the same idea to many goods - not just airline tickets. Basically, this could work for any redeemable good, and makes sense whenever there is often varying or difficult-to-predict demand. You could try the same system with broadway shows, tickets to sporting events, or major concerts. I can also imagine using this system on pre-release sales for anticipated products, such as a new model of computer, video game system, or even a car.
As an analogy, we could think of an ecosystem in which a single predator eats more than his/her share of the prey to spite competing predators. But in the ensuing system, the entire species of predator without competition thrives -- there is little basis for natural selection, and the usual advantages of evolution are lost. By eliminating the competition, the predator becomes lazy and less competent without the filtering of survival of the fittest.
What can we prey do to improve our lazy incompetent predators? (Actually, this idea also hopes to improve things for both parties.)
How about: airlines could sell tickets ahead of time for half their desired price, allow tickets to be resellable through a centralized system, and then collect half of the final customer's price when that customer boards the plane.
Here is a quick example: Awesome Airlines sells Barbara a ticket from NYC to LA on a certain date and time for $200. Barbara is now free to re-sell the ticket as she sees fit. Demand for tickets goes up, and Barbara sells to Carl for $300. Demand goes way up, and Carl, who did want to fly to LA, decides he's better off flying later, and agrees to sell for $400 to Darlita. Darlita is the final customer, and before she boards, she pays Awesome Airlines another $400, so her final effective price is $800. In this case, Awesome Air got $600 for the flight, while Barbara and Carl each made $100. You could argue that Darlita got hosed, but in the current system it is more likely that either she would have had no way of getting on that flight at all (if the tickets were sold out), or that the airline would then be asking for $1000/ticket since it had anticipated high demand -- a price too dear for Darlita.
We could also imagine that demand goes down after Barbara buys her ticket for $200, in which case she can cut her losses by selling for $100 to Ebert. In this case, Barbara's misplaced hope that the demand would go up cost her $100. The airline still collected $300 for that ticket despite their misjudgment of hoping to get $400 for it, and Ebert was able to fly despite his unwillingness to pay $400.
Exactly why is this system any better? Primarily, it avoids the hassle (for both the airline and customer) of having to guess where the best price is, while at the same time hedging the risk for the airline by encouraging that they usually earn at least 50% of their desired revenue for every flight.
It is good for customers because customers won't get screwed by high prices when there is really not much demand. If there is high demand, then prices may temporarily go up, but ultimately, airlines will naturally move to fill in the flights of higher demand, so that supply and demand stabilize and prices will come back down.
It is good for airlines because (1) they are more likely to always sell at least half of their desired ticket prices, and (2) they can get much more money where there is high demand. In addition, they get much more direct feedback about where the financial demand lies for certain flights.
I can imagine one objection being that purchasing flights now is somewhat convenient (I really think it could be a lot better, though!) but it may seem to be much less convenient if you need to go and find a random person from whom to negotiate your price.
Aha! But I think, if the system is well-designed, purchasing tickets would actually become easier! Why? Think of a large stock exchange system -- trades are effectively made between a plethora of owners at lightning speed. Because the trading is centralized and well-organized, there need be no concern about finding a seller or face-to-face negotiations. In addition, it becomes much more reasonable to book flights which include a layover, since we can now very reasonably work with completely unassociated airlines in choosing a multi-flight trip.
Unfortunately, I doubt this would happen. Some people would be concerned about the security risks of knowing who is buying tickets in the resell system, although this could certainly be handled as well as the current system. Airlines would be concerned about the increased financial risk, although in the long run it is actually reduced risk for any half-decent airline. Finally, it would probably require some legislative support, which means some popular support, and that seems extremely unlikely as long as any single powerful airline or politician is against it.
In any case, it's still a cool system, and we could apply the same idea to many goods - not just airline tickets. Basically, this could work for any redeemable good, and makes sense whenever there is often varying or difficult-to-predict demand. You could try the same system with broadway shows, tickets to sporting events, or major concerts. I can also imagine using this system on pre-release sales for anticipated products, such as a new model of computer, video game system, or even a car.
posted by Tyler | 11:56 PM
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