Pricing models are something that have long fascinated us. So compelling is the topic that it’s a well known form of entertainment amongst economists to try and decipher how businesses set prices. This is especially fun when there’s a good reason to think that there might be something unintuitive and more interesting than simple supply and demand. For example, why is popcorn so expensive at movie theaters? Why are products often featured in sets of three? Why do so many prices end in 99 cents? The answers to these questions might surprise you, and if you’re lucky, perhaps we’ll cover them another day. Today, however, there’s a very specific story we want to share.
Recently I took 4 hour flight to a family reunion. As is often the case these days, the airplane was equipped with individual television screens offering DirectTV. Prior to takeoff, all the channels were available, but a few minutes after takeoff the screens went dark, informing us that if we wanted to continue with the entertainment, the cost would be $10 for the flight. I had a phone full of downloaded audio and a book to boot, so I passed. And yet, two hours later, tired of listening to podcasts and dissatisfied with my book, I decided to rethink my choice to pass on the DirecTV.
And this is where things get interesting: the cost was still $10.
For most of you, this won’t seem like much of a surprise. After all, in our daily lives we most often come into contact with prices that are for the most part stable. Food, clothes, rent, utilities…mostly stable. But for me and my cursed amateur-economist brain, I was immediately flooded with questions regarding the DirecTV pricing. Basically, my issue was: If it wasn’t worth $10 to me for the entire flight (4 hours of television), was there any reason to think that I might be willing to pay the same amount for only 2 hours?
When it comes to prices for goods and services, it’s a pretty reasonable starting point to assume that companies are using ones that maximize profits. Ignoring all the delicate intricacies of tax policy, legislative issues and other free-market disruptors, firms themselves have the highest self-interest in charging prices that maximize profits. If that’s the case, then it’s interesting to think about potential reasons why charging the same in-flight price might be profit maximizing. I can come up with at least two, one which is most likely just a personal gripe, and the other which has the scent of truth.
First, my personal gripe: Flying isn’t fun. AT ALL. More often than not, it’s an uncomfortable, crammed, sweating, unpleasant hassle. The airlines know this, of course, and they also know that the longer the flight is the more unpleasant things tend to be. Specifically, for the purposes of pricing, airlines know that as time passes post-takeoff, the experience gets increasingly unpleasant. This rings true to my experience, especially since two hours into my actual flight, I felt the impulse to improve my dreadful experience by revisiting the DirecTV offer.
Essentially, what you have here are two competing inputs to the purchase decision: the amount of time remaining in the flight and my current level of discomfort. Both of these are time domains that, interestingly, are in opposition to one another. To wit, the more time I’ve been crammed into my chair, the more uncomfortable I am (adding value to the purchase), yet the less time I would have remaining on my purchase (reducing value from the purchase). That the pricing model doesn’t budge throughout suggests that – all other pricing influences held equal – the airline knows that over time my displeasure with the act of flying will eventually overpower the diminishing time value of the purchase.
That’s how the airline gets ya.
And yet, as satisfying as it is to imagine airlines as evil empires ignorant to the plight of their customers, I seriously doubt their pricing model is intended to benefit from bad in-flight conditions. Were that the case, another airline could simply swoop in, offer a better experience and steal my business, rendering the DirecTV offer moot.
A more sensible explanation of the pricing model would have to incorporate the idea that flying is something that people do a lot, and a significant portion of an airline’s revenue is generated by repeat business. Even for someone who flies with my frequency (4-6 round trips/yr), the flight experience is something that will be repeated many times. The next time I fly, there’s a decent chance that I am likely to remember how dreadful my last experience was mid-flight, and how at that time I would have been willing to pay perhaps 80% of the original cost (or $8) for 50% of the service (the remaining half of the flight). And if that’s true, I’m likely to make the small mental accounting leap that if I would be willing to pay $8 for the second half of the flight, it seems like highway robbery to get the first half for merely $2 more.
I suspect that the repetition of the flight experience is the biggest driver of their pricing model. This is a somewhat verifiable assumption if data exists showing that a high percentage of purchases take place early in the flight. It would further buttress the theory if statistics showed that the tendency of users who first purchase DirecTV mid-flight evolve into people who make the purchase immediately. In fact, the faster that evolution occurs, the more important “repetition” would be as a contributing factor to the pricing model.
I’d love to see the data, but that’s just me. After all, these are the types of things that keep me awake at night. These are the types of things I like to talk about at dinner parties. And these are the things that I can’t help but write about.
As for my next flight, I don’t know if I’m going to buy the DirecTV. But I can tell you this: If I don’t buy it the moment the plane takes off, I’m almost certain to not buy it at all.