I routinely teach my intermediate microeconomics students that unfettered market transactions take place because consumers and producers both gain from such transactions. However, when a producer has market power and the consumer either possesses very little or none of it, this producer has a strong incentive to engage in what economists call price discrimination. The basic objective of price discrimination is straightforward: the producer would like to transfer some of the gain (or surplus) in a market transaction from a consumer to itself. Put differently, a firm engaging in price discrimination would like to increase its profits at the expense of consumers.
Although price discrimination is prevalent in many industries, it is particularly visible in the airline industry. Readers of a certain vintage will recall the days when air travel meant free food, free headphones, and free checked bags. Most of these perks are now gone. In their place have come a variety of fees. Fliers today generally pay to check bags, to consume lousy food and for a few extra inches of legroom.
To add insult to injury, a recent Washington Post article notes that early in 2017, United Airlines plans to start charging fliers for the benefit of stowing carry-on luggage in the overhead bins of their planes! In other words, yet another perk that air travelers have routinely taken for granted may soon disappear. To his credit, Sen. Chuck Schumer has castigated this planned action and, in the process, has colorfully noted that “the overhead bin is one of the last sacred conveniences of air travel.”
United’s official line is that there is, in fact, no new fee but that it is simply introducing a new fare called “basic economy” that will not allow fliers to have any overhead bin space. So, if you purchase this cheap fare, you will essentially be limited to carrying only that which you can fit underneath the seat in front of you. Note that this potential new fee will almost certainly adversely affect families traveling with children, passengers with special needs and elderly fliers.
In contemplating this overhead bin fee, United is clearly planning to practice one kind of price discrimination. From its perspective, United is acting rationally, and one can provide a justification for airline price discrimination. To see this clearly, consider the extra fee for checked luggage. Transporting heavy bags makes planes heavier; this increases fuel costs, which ultimately increases fares for all fliers. A fee on checked luggage encourages fliers to travel light. Only those who insist on checking heavy bags pay the extra fee and this keeps the cost of air travel lower than it would otherwise have been.
As noted by Jordan Weissmann, Slate’s senior business and economics correspondent, the above logic can also be used to justify the overhead bin fee. The point is that even though most us—business travelers in particular—would prefer to board with two bags and use the overhead bins, by charging the bin fee, United is ensuring that only those travelers who want the bins most (and are able to pay) get to use them. In this way, the airline is able to lower the cost of flying for those who do not use the overhead bins.
This economic logic notwithstanding, my sense is that United’s overhead bin fee, if it comes to pass, would be one fee too many for most fliers. After all, the decision to fly and which airline to fly is based on both economic and non-economic factors. Nickel-and-diming passengers beyond a point is likely to be counterproductive to United’s bottom line because fliers do have options.
Having said this, it is important to note that one often sees copycat actions in the airline industry. So, following United’s lead, if most or all airlines institute overhead bin fees, it will be practically impossible for consumers to exercise any meaningful choice as far as their flying options are concerned. Given the market power possessed by the major airlines, perhaps it is time for some regulatory action before airlines start charging fliers extra to either sit or to use the restroom in planes.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.