Bryan Caplan  

Fairness Norms Breaking Down at the Airport - and Good Riddance!

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Strange as it sounds, firms often give stuff away. Sometimes the reason is that the good is so cheap that it's not worth charging charging for it. See: water at restaurants. Other times, though, firms give stuff away to appease consumers' misguided sense of fairness. See: unlimited hours of table space at popular restaurants on Friday night. Inefficiency is the result.

Funny thing: During my flights to and from Chicago for the IHS seminar (BTW: It was a complete blast), I noticed that airlines' pandering to the public's misguided sense of fairness seems to be breaking down. Two big examples:

1. Airlines (or at least United and Air France) are now charging extra for additional and overweight baggage. Lots extra. Under the old rules, consumers had little incentive to take the marginal costs of baggage into account. Now there's a big incentive.

2. I missed my flight this afternoon. (But it was probably worth it. Yum). Instead of just putting me in a standby queue for the next flight, though, the airline guaranteed me a seat for an extra $75. It was a load off my mind - otherwise I would have been mortally afraid of being delayed for Capla-Con! More importantly, though, this was a big step in an efficient direction.

I strongly suspect that rising fuel costs are behind these changes. Airlines know that - one way or another - consumers are going to be upset about price increases. But airlines seem to think that consumers will be less upset about "unfair" surcharges than "unfair" fare increases. In short, it looks like high fuel prices are making airline pricing policies more efficient. Who woulda thunk it?


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COMMENTS (19 to date)
Les writes:

It seems extremely naive to regard a glass of water as "free" or to regard firms as giving stuff away free. Would a restaurant let someone sit at a table if only a glass of water was ordered? Or do firms give free stuff to people who are not current or likely prospective customers?

Whatever package of goods and services one receives is in exchange for money. Sure there may not be a specifically identified charge for one given item. But one should consider the entire package vis-a-vis the total price.

As Milton Friedman famously said: "There is no such thing as a free lunch."

Snark writes:

When bookstores allow consumers to read their books for free (like The Myth of the Rational Voter, for instance), are they catering to a misguided sense of fairness or peddling cheap goods?

Kurbla writes:

I agree with previous comments. I do not see the Swedish table as inefficient way of serving just because consumers are not billed exactly for what they ate.

Billy writes:

Similar to why airlines are now charging for additional and overweight baggage. Several Atlanta area restaurants are now serving water on a request-only basis. The area has been plagued by drought for over a year now. As a result, their water rates have gone up and it is no longer worth it to provide this amenity. I suspect that if the drought continues and/or if rates continue to rise, some restaurants may stop providing tap water altogether and begin only offering bottled water.

Finja writes:

funny... I thought, airlines always charged more for overweight baggage?
When I flew from Frankfurt to Chicago in 2001 with Lufthansa, it would have cost me about 120 D-Mark (around $60 at this time) to have overweight luggage. Per Kilo.
Flying to Cape Town last year, South African Airways charged something around €45 per Kilo.

By the way, SAA discriminates against Europeans, and I still don't know why: Americans are allowed to have 40 Kilo per person luggage, Europeans only 20 Kilo. If anyone has any ideas on this, please let me know!

Matt writes:

Brian, did you have the hamburger at Rosebud? It's been rated the best in Chicago the past three years by the Tribune. I've had it, it's delicious!

liberty writes:

"See: unlimited hours of table space at popular restaurants on Friday night. Inefficiency is the result."

Totally disagree. Unlimited time is key in restaurants, popular or not. I never return to restaurants that make me feel rushed.

RL writes:

Taxis usually charge a price per unit distance (1/5 of a mile, I think), AND also charge a per unit time charge for sitting in traffic. You can have the cab driver drive you to place A, stop and wait while you pick something up, and then drive you to place B. But they'll charge you for just sitting there waiting for you.

Restaurants could do the same; bill you for what you eat and also have a time charge for sitting at the table for an extra 90 minutes sipping on free refills of coffee you got with desert. No one is suggesting they kick you out when you're done eating (like a hotel will kick you out of the room when your stay is over). No one is even suggesting they make you feel rushed. Bryan is simply pointing out that not charging you for the time you sit not eating is economically inefficient (or so he argues).

RL writes:

On my last flight, listening to the captain make his routine introductory announcements after takeoff, I heard him say something I've never heard any captain say before:

He indicated the total number of passengers onboard; the amount of gas in the plane's fuel tank, the distance of the trip, and the average mileage the plane gets. From this he calculated the cost of gasoline per passenger for the trip. It amounted on my trip to about $85. The implication, of course, was passengers should be aware of company costs and not just assume that when the cost of their flights increase by $10 or they're asked to pay for refreshments or extra baggage, it's pure profit for the company.

Kurbla writes:

I'm surprised that libertarians in the same time believe that (a) free market is efficient and (b) free market winners (e.g. restaurants) make such mistakes that not only amateurs, but even outsiders can spot it - and that they repeat same mistake for decades or in this case, probably for centuries.

It appears to me that (a) and (b) is in contradiction.

RL writes:

It's quite possible that the real answer, Kurbla, is that we think the market has reached an efficient equilibrium--charge more than one would otherwise for the food and don't worry about the sitting-at-the-table inefficiency--but would prefer, and hope an entrepreneur would consider, a niche market where you pay less for the food, don't have to wait two months to get a reservation at the best tables, and give up sitting around enjoying the ambience. Granted, we may be a non-profitable minority, but we can always hope.

James writes:

Kurbla-

It seems that you have little idea of who you are talking to. First of all, this isn't a "libertarian" site - I doubt Prof. Caplan would self-describe that way (he maintains a massive archive on anarcho-capitalism). Second, restaurants have a massive fail rate and, considering gains from trade, I don't know what they are "winning" (or who is losing). Third, Prof. Caplan is a Professor of Economics - he is neither an amateur or an outsider to the issue of how businesses make money.

Garrett writes:

RL:

Weren't you pretty much describing McDonalds?

Josh writes:

I think the "winners" Kurbla is referring to are the restaurants that don't fail. The restaurant industry is so competitive (as James points out) that if these freebies are significant inefficiencies why haven't market innovations already developed solutions?

People who buy drinks are subsidizing people who drink water, but at pennies on the gallon, the subsidy is practically a rounding error. As an amateur (someone with no RESTAURANT experience), the practice of tipping, with its incentives to freeride seems like a greater inefficiency than free water. But what do I know?

Teddy writes:

I completely disagree with those who said that unlimited table time is not-inefficient. The key word was "popular" implying that those people sitting at the table at no monetary cost to themself are causing a line to form at the head of the restaurant which will deter many.

David J. Balan writes:

I think the workings of consumer indignation and of firms' responses to it are important and under-investigated, particularly in health care markets where powerful emotions and messed-up incentives both ride tall in the saddle. I have a paper on this if anyone is interested: http://works.bepress.com/david_balan/3/

liberty writes:

I would not wait or pay the price of the expensive popular restaurant unless I could stay as long as I want without rush. The food, ambiance, length of stay, etc are all bundled in to the price of the food. I would not want to be charged separately for the length of my stay - then in a group, cheap or poor guests would feel rushed or feel bad. The bundling is efficient, because its part of the experience.

Most people would agree on this - to the extent that they don't, other restaurants cater to their needs. Pretty much all tastes are catered to in the restaurant business (see Tyler Cowen's exotic food guide)

Ellsworth writes:

Couldn't a full restaurant with customers leisurely eating and a long line of customers waiting be considered efficient?--see Olive Garden or any other similar generica restaurant on a Friday night. There must be a psychological motivation that allows people to wait 60 minutes or more--and it can't be the food. It seems The Olive Garden does not have to be concerned with the customer who arrives and decides not to wait.

Lucas writes:

I used to live about 3 blocks away from the Little Italy Rosebud restaurant; that neighborhood is, I think, one of those areas that makes Chicago so "livable" compared to some other huge cities. My wife and I used to visit that place like the typical suburbanite would visit Olive Garden. :)

Also, as your attorney in this matter, I advise you to sample Gino's East or Pizzeria Uno immediately. If you are already introduced to Chicago pizza, try Pequod's on Webster for something new.

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