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

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additional legroom throughout its fleet‘s coach cabin and United Airlines‘ Economy Plus cabin,which offers a cabin class between their coach and business class products.The decision to cut or scale back these products may have provided entrepreneurs withincreased awareness to the gains from a-la-carte pricing techniques; recently discontinuedproducts provided an opportunity for airlines to experiment with new ancillary products. Forexample, as discussed in the introduction, many carriers began reintroducing meals and heaviersnacks as part of food-for-purchase programs. And while American Airlines completely didaway with its enhanced legroom product, United Airlines began offering coach customers accessto Economy Plus for an a-la-carte fee, based on availability. These early forays into a-la-cartepricing likely gave airlines the impetus to enact further unbundling initiatives and provideduseful experience regarding what sort of ancillary charges would earn revenue for the airlines.The evolving awareness of profitable unbundling strategy as a driver of the ancillary revenuemovement of the 2000s cannot be understated.Solving the First-Mover ProblemUltimately, the only way a firm truly knows the outcome of a certain pricing change isthrough a market test. This indicates that there will always be some level of uncertainty involvedwith a change to the pricing structure, as discussed in the literature review. This uncertaintyabout an emerging technology or market conditions can spell out a disadvantage for first moversin the industry and give late movers a gain, potentially discouraging or delaying adoption of aspecific innovation (Lieberman & Montgomery 1988, 47). Ultimately, the first mover may riskmonetary or non-monetary losses if market conditions turn out to be less favorable thanoriginally expected; this is tied in with the fact that other firms can free ride on the risks42
undertaken by the first mover. Nonetheless, Wernerfelt and Karnani (1987) point out that certainfactors may mitigate the reluctance to be the first mover, factors such as first-mover advantagesor the ability to influence the way that the uncertainty is resolved. Hoppe (2000) formalizes theanalysis of technological uncertainty in an economic model, showing that in equilibrium, thesecond mover has a strategic advantage that arises from observing the profitability of the firstmover‘s actions (316).Multiple interviewees characterized the industry situation surrounding the decision tounbundle the second and first bag fees as having elements of a first-mover disadvantage for aircarriers in 2008. As one interviewee said, ―First mover tends to carry a pretty big risk, and sincethe technology is slow to catch up, [an airline runs] the risk of being out there for quite a bit oftime. Someone may want to match you today, but their systems may not enable them to catch upfor six months, a year, weeks. And you‘re kind of taking it on the shin until everyone catches up.‖Ultimately, interviewees said that the airline only felt comfortable charging bag fees when it wascertain that it could earn revenue from that strategy even in the case where all other airlinesmoved to a free checked-bag policy.Once again, even with sound analysis, uncertainty is still a factor that may limit a firmfrom taking action. For example, U.S. Airways likely had strong market research and soundanalysis before it instituted a policy of charging for onboard soft drinks in 2008. Nonetheless,amid consumer backlash and no similar fee from other large network carriers, it withdrew thecharge several months later. While there is no substitute for a market test, revenue pressure andother incentives facing airlines in the 2000s made them more likely to take the plunge and bearany potential uncertainty to reap additional revenue.43
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 20 and 21: and/or services. This is because co
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 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
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Page 66 and 67: customers may pay to upgrade to a h
Page 68 and 69: than it would if it offered that pr
Page 70 and 71: airline‘s decision to offer a cer
Page 72 and 73: New Mexico Business Weekly. 2010.
Page 74 and 75: A number of interviewees pointed ou
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Page 78 and 79: they have not significantly impacte
Page 80 and 81: potential to lower fares, but that
Page 82 and 83: Figure 4.3 - U.S. Airlines Average
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Page 90 and 91: there‘s . . . a quality issue the
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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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