Tuesday, December 09, 2008

Airlines and the Framing Effect

I'm puzzled by the fact that airlines have started charging extra fees for baggage. Haven't they heard of the framing effect? They should charge everyone the price for carrying three bags, and then give a "discount" if you check any fewer bags. As Tversky and Kahneman write:
Thaler (1980) drew attention to the effect of labeling a difference between two prices as a surcharge or a discount. It is easier to forgo a discount than to accept a surcharge because the same price difference is valued as a gain in the former case and as a loss in the latter. Indeed, the credit-card lobby is said to insist that any price difference between cash and card purchases should be labeled a cash discount rather than a credit surcharge.


Blogger sean said...

I think that the issue is that most passengers use travelocity or various other such services to identify the "cheapest" fare. Then, having booked a ticket, they pay whatever extra charges they must pay at the gate with cash, just like the overpriced donuts and coffee they buy in the airport.

8:42 PM  
Blogger John Thacker said...

I definitely agree with sean. The origin of the current problem is that people shop around for the lowest fare on travel sites that treat all flights as commodities with the same services. Since non-frequent travelers aren't going to keep track of what airlines offer what services (unless Southwest, which doesn't participate in sites like Orbitz and Travelocity, but makes people go to their website, reminds them via advertisements), airlines can safely have the cheapest advertised fare and then hit people with fees.

Note that the elite frequent travelers are typically exempted from these fees, as they'd know enough to find the real price anyway.

4:22 PM  

Post a Comment

Subscribe to Post Comments [Atom]

<< Home