July 15 JDN 2458315
At Disneyland, you can now buy a special pass that will let you skip ahead in line. On several airlines including American, Delta, Spirit, and Southwest, you can pay extra to be allowed to board before other passengers (which has been particularly salient for me on the many flights I’ve been taking this summer). This is only an extreme form of a long-standing phenomenon: Since the beginning of commercial ship and train travel, there have been first-class and second-class tickets.
I don’t have any formal survey data on the matter, but just about everyone I have spoken to about such policies is at least vaguely uncomfortable with them, if not totally outraged. The exception is other economists, who typically don’t express any concern whatsoever. “People are willing to pay for this service because they value it,” they say; “so what’s the problem?”
On this one, I think the economists are wrong and everyone else is right. There is something different about this sort of service.
Part of the difference between first-class and second-class is in actual quality of services that actually incur additional costs (I hate to break it to you, but legroom on an aircraft is just such an example; every inch of legroom on each seat is another row of seats they can’t have, which is another $2000 or so they don’t get in revenue on each and every flight). But part of it is something else, something that costs the company literally nothing.
This makes early boarding a clearer example. What are you buying when you pay for early boarding? On most airlines, it’s not even a better seat; your seat is pre-assigned (Southwest is an exception). We could say you are paying for extra time, but that’s not really even true; the plane leaves at the same time for everyone. From your perspective, you are paying for convenience; you get to settle in on the plane, maybe get started working or whatever, before everyone else. Maybe you’d rather wait on the plane than wait in the airport (though frankly I’m not sure why; the airport has restaurants and comfortable restrooms).
What you are really buying is position. Early boarding is a positional good. Every person who gets bumped forward in the queue is someone else who is bumped backward. The net benefit for all customers as a whole is precisely zero, as is the cost for the company to provide it—and yet, it still has a positive price! This is impressive economic alchemy: The airline has managed to take something with zero marginal cost and zero marginal benefit, and still make money off of it. They have transmuted the lead of something costless and worthless into the gold of profit.
They achieve this by pitting customers against one another. In a post awhile back I talked about rent-seeking, such as lobbying and advertising. Usually it’s the corporations doing the rent-seeking, but early boarding and queue-jumping are examples of corporations intentionally generating a circumstances where they can obtain revenue from the rent-seeking of others.
To be fair, there might be some welfare gains to be had from auctioning off order in a queue. Some people have genuinely higher costs of time than others (a cardiac surgeon’s time is particularly important, for example), and an auction could potentially order people who have very high cost of time first.
But this argument is much weaker than it may at first appear, because people also have very different marginal utility of wealth, and indeed I think the correlation between your willingness to pay for time and your total wealth is considerably higher than the correlation between your willingness-to-pay for time and your actual real cost in terms of pain and suffering.
This is a more general problem, as I’ve discussed in previous posts; but I think it’s especially acute in the case of time, because real cost of time doesn’t actually vary all that much between most people. The reason poor people take buses and rich people take limousines isn’t because poor people don’t care about their time; it’s because they can’t afford limousines. A cardiac surgeon and an economist could very well have the same salary and the same willingness-to-pay for time, but people rarely die when an economist turns up an hour late. (It’s not that our work isn’t important—actually a good development economist can save far more lives than any cardiac surgeon—but it’s not nearly so urgent.) Also, consider the fact that teachers and social workers generally contribute a good deal more to society than derivatives traders (and thus, from a social welfare perspective, their time should be considered more valuable), but they are far less likely to pay for first-class seats. In fact, a first-come, first-served method actually seems better than an auction from a social welfare perspective: If your time is really important to you, you’re more likely to go out of your way to check in as soon as you can. That costly signal provides a sorting mechanism which relies directly upon real costs of time, rather than indirectly via monetary willingness-to-pay.
And of course when it comes to Disneyland, this argument utterly fails; I see little reason to think that a cardiac surgeon’s vacation time is substantially more valuable to society. (Don’t get me wrong; surgeons need and deserve vacation time—but if they get too much, their performance actually suffers!) So maybe paying for a place in queue isn’t completely rent-seeking, but it’s pretty close.
That is why paying for positional goods feels unjust to most people: Because it is. Charging a price for positional goods is a means of extracting profit from customers without providing any (net) real service. It’s a way of applying price discrimination without even having much monopoly power. If another airline doesn’t let you pay to skip ahead in the queue, you have a slightly lower expected wait time on that other airline, but any revenue they lose from charging a bit less for economy tickets can be easily made up by charging more for the front of the line.
For example, if the first 10% of the line on airline A is decided by selling spots, while airline B chooses at random, and the average time waiting in line to board is 30 minutes, the expected wait times are as follows. Fly airline A and don’t buy a spot: 16.5 minutes. Fly airline A and buy a spot: 1.5 minutes. Fly airline B: 15 minutes. Those 10% are paying for, on average, 13.5 minutes; but you’re only gaining 1.5 minutes. Of course, there are more people waiting that extra 1.5 minutes than saving those 13.5 minutes (9 times as many, in fact). If the per-minute willingness-to-pay were exactly the same, the airline would break even; but they know of course that the willingness-to-pay of that top 10% is considerably higher than that of most of the bottom 90%. If they have any market power at all (which they generally do, by being the only airline serving certain routes, offering loyalty benefits, etc.), they can squeeze out even more profit.
They may even sometimes go out of their way to make life miserable for those who don’t pay extra, increasing the incentive to pay extra. This requires some market power to pull off, but as I said, they often have that. Most airlines don’t offer power outlets at every seat, for example. This is not a serious question of installation cost or even power consumption. We’re talking about a few hundred dollars on an aircraft that costs hundreds of millions of dollars, or a few kilowatts from a system that can generate over one hundred megawatts (of course most of it is used for propulsion, but adding an alternator that would generate an extra few kilowatts of electrical power would still not be difficult or expensive). This is a way of making life worse for the economy-class passengers so they have a stronger incentive to pay for upgraded tickets.
It’s not always easy to tell what is a positional good: First-class seats are ambiguous, for example. But I think a good heuristic is to ask, “Could everyone benefit from this?” If the answer is “No, even in principle”, then you are definitely dealing with a positional good. Not everyone can be first in line at Disneyland. Not everyone can board the plane first. In theory at least, everyone could be provided the same legroom and meal service as a first-class ticket (it would be expensive, but not impossible), so that is at least in part not a positional good.
The “pay-to-win” effect of some video game downloadable content (DLC) is also a positional good, which we can see by the above heuristic: If everyone pays to have the best gun in the game, there’s no point in having the best gun in the game. This is why gamers are rightfully outraged by “pay-to-win” effects, but typically have no objection to paying for DLC that provides them with extra game content (such as new characters, locations, or missions) or cosmetic upgrades (hats, decorations, and “skins”). Personally I tend to think that most DLC is overpriced, and succeeds at being so due to a kind of monopoly power (Mass Effect DLC doesn’t work on Skyrim or vice-versa) but I certainly don’t object to the basic idea of charging additional money for additional content. The reason we object to “pay-to-win” is not that winning the game is so important; it’s that this business model is so obviously a form of rent extraction. (It’s interesting that gamers in China don’t seem to be as bothered by “pay-to-win” as gamers in the US; this runs counter to the standard narrative that American people are competitive capitalists and Chinese people are collectivist socialists, don’t you think?)
There may be some circumstances in which we have no choice but to allow corporations to charge prices for positional goods—especially if we can’t tell whether we are dealing with a positional good or not. But it would not be very difficult to draft legislation that would at least reduce such business practices: We could simply use my “Could everyone benefit?” heuristic. If a business charges money for something that even in principle they could not possibly provide all of their customers, they are charging a price for a positional good, and should be penalized. The benefits of such a policy would be relatively small, but the costs would be even smaller. If we are really concerned about letting cardiac surgeons board aircraft faster (we should really be concerned about deboarding faster—and especially faster security screening!), we could make such a rule that applies to particular classes of high-urgency professions; we don’t need to allow airlines to extract millions of dollars in rent by pitting their customers against each other.