A-La-Carte Pricing in the Airline Industry - Graduate Student ...

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and/or services. This is because consumer demand for an ancillary good offered by an airline isexclusively contingent on purchase of the base fare. For example, nobody would want to pay fora bag check service or a meal onboard the airplane if she were not going to undertake a trip.Given that these products are offered exclusively to complement the air travel experience, anairline faces somewhat of a dichotomous choice between bundling with a single price andunbundling with a two-part price.The Role of EntrepreneurshipOne of the key factors weighing into an airline‘s pricing decision and other businessstrategies is the role of the entrepreneur. It is important to remember that pricing decisions at theairline are ultimately made by individuals who become aware of new profit opportunities in thefield and decide to take action based on future rewards. This basic notion goes back to Kirzner(1973), who emphasized that the human element of the entrepreneur is a more germanedescription of innovation than a faceless organization that is solving a simple optimizationproblem. Furthermore Kirzner‘s work, as well as the earlier work by Schumpeter (1947),emphasizes that entrepreneurial innovations require alertness to previously unexploitedopportunities and some sense of ―creative response‖ to take action in reply to those opportunities(150).Kirzner asserts that the entrepreneurial process is rooted in a framework of means andends that defines the entrepreneur‘s economizing problem (Kirzner 1973, 32–33). Ultimately, abusinessperson wishes to achieve a certain set of goals (ends) but faces constraints as to thepotential courses of action to achieve them (means). Ultimately, human action leads14
entrepreneurs to become alert to new goals and the discovery of previously unrecognized meansof achieving those goals.The process of becoming aware to new, more profitable opportunities is not necessarilyperfect—even those who have the information to develop new entrepreneurial opportunities maynot discover those opportunities due to an inability to see relationships between the means andthe ends of the opportunity (Shane & Venkataraman 2000, 222). Ultimately, the entrepreneuralso has limited time and attention that can be spent on a certain idea. The existence of morelucrative opportunities may take focus away from other opportunities that may be relevant butare relatively less important or lucrative.As Gifford points out, entrepreneurs possessing scarce attention also face a choicebetween allocating attention to current operations or innovating new strategies to achieveprofitability (Gifford 1992, 276). Ultimately, Gifford finds that a firm‘s propensity to search fornew profit opportunities is a function of how sustainable the current business arrangement is ingenerating profits. With limited attention to allocate, airlines were likely focused on maintainingstrategies that generated modest profits through the late 1990s, prior to the events of September11th. Furthermore, the nature of the LCC threat was still uncertain at that time, weakening theincentives to look for radically new pricing arrangements during the 1990s.In addition, as Gifford discusses, the entrepreneur must often bear uncertainty whenresearching and pursing new strategies, a very different concept from a predictable risk. Perhapsthe first economist to seriously discuss and analyze risk and uncertainty was Knight (1921), whois well known for his distinction between the two concepts. Knight defines risk as a characteristicthat can be measured and understood by the entrepreneur, whereas uncertainty cannot truly bemeasured (I.I.26). For example, a situation of entrepreneurial risk would involve knowing that a15
Page 3 and 4: A-La-Carte Pricing in the Airline I
Page 6: IntroductionAnyone who has flown re
Page 10 and 11: Additionally, the chapter will prov
Page 12 and 13: compete with their rivals to attrac
Page 14 and 15: The Start of the Ancillary Revenue
Page 16 and 17: In these examples, this fee exists
Page 18 and 19: this strategy. Nonetheless, Button
Page 22 and 23: new production process will have a
Page 24 and 25: entrepreneurial awareness that a mu
Page 26 and 27: Chapter 1 ReferencesAdams, William
Page 28 and 29: Sharkey, Joe. 2001. ―Business Tra
Page 30 and 31: Between 1993 and 2007 alone, averag
Page 32 and 33: such a scenario faces strong incent
Page 34 and 35: uncorrelated with their spatial loc
Page 36 and 37: additional price differentiation di
Page 38 and 39: gallon to 298 cents per gallon: dur
Page 40 and 41: Despite these indications that the
Page 42 and 43: Despite this open question, it is c
Page 44 and 45: transactions at the airport. Histor
Page 46 and 47: The Role of Entrepreneurial Attenti
Page 48 and 49: additional legroom throughout its f
Page 50 and 51: ConclusionThis discussion in this c
Page 52 and 53: Chapter 2 ReferencesAir Transport A
Page 54 and 55: Morrell, Peter. 2005. ―Airlines W
Page 56 and 57: most recent quarter for publicly re
Page 58 and 59: variation is present, with peaks du
Page 60 and 61: compete for customers in a manner s
Page 62 and 63: always perfect, however. For exampl
Page 64 and 65: chance for bags to get delayed or g
Page 66 and 67: customers may pay to upgrade to a h
Page 68 and 69: than it would if it offered that pr
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airline‘s decision to offer a cer
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New Mexico Business Weekly. 2010.
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A number of interviewees pointed ou
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airline, and even the industry as a
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they have not significantly impacte
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potential to lower fares, but that
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Figure 4.3 - U.S. Airlines Average
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Figure 4.4: Ratio of JetBlue Airway
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emembered that this characterizatio
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One additional consideration that m
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there‘s . . . a quality issue the
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kit are able to keep the pillow and
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(such as meals, books, and blankets
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[certain customers] because there
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Chapter 4 ReferencesArmstrong, Mark
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Chapter 5: The Policy Implications
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Niskanen (1968) points to the budge
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Necessity is ultimately a term that
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who do not check luggage would end
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they are lowering their effective t
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Unsurprisingly, no airlines have cl
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each scenario, meaning that they se
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Figure 5.1: Ancillary Fee Disclosur
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unaware of certain airline pricing
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One important consideration involve
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Chapter 5 ReferencesArrow, Kenneth
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Niskanen, William A. 1968. ―The P
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Far from being a mechanical solutio
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