Monopoly Power and Hidden City Ticketing

[alex_tabarrok]

Originally posted on May 16, 2011.

Students love it when we show them how economics explains their world. In our chapter on monopoly we pose the following puzzle:

In December of 2006, American Airlines was selling a flight from Washington (D.C.) to Dallas for $733.30.  On the same day, it was selling a flight from Washington to San Francisco for $556.60.  That’s a little puzzling. You would expect the shorter flight to have lower costs, and Washington is much closer to Dallas than to San Francisco.  The puzzle, however, is even deeper.  The flight from Washington to San Francisco stopped in Dallas.  In fact, the Washington-to-Dallas leg of the journey was on exactly the same flight!

Thus, a traveler going from Washington to Dallas was being charged nearly $200 more than a traveler going from Washington to Dallas and then on to San Francisco even though both were flying to Dallas on the same plane.  Why?

We then explain the Hub and Spoke system and how this gives each airline monopoly power over certain interior destinations, concluding:

Eighty-four percent of the flights into the Dallas-Forth Worth airport are on American Airlines, so if you want to fly from Washington to Dallas at a convenient time, you have few choices of airline. But if you want to fly from Washington to San Francisco, you have many choices. In addition to flying on American Airlines you can fly Delta, United, or Northwest. Since travelers flying from Washington to Dallas have few substitutes their demand curve is inelastic…since travelers flying from Washington to San Francisco have many substitutes, their demand curve is more elastic…As a result, travelers flying from Washington to Dallas (inelastic demand) are charged more than those flying from Washington to San Francisco (elastic demand).

Recently, Nate Silver, had a piece in the New York Times Magazine explaining how a savvy traveler can avoid these monopoly prices by booking a one-way Washington to San Francisco flight and then exiting in Dallas.  Silver also had a nice graphic, which could be usefully added to a powerpoint, showing a number of these types of fares.  If you or you students make use of these methods, however, be careful to note Silver’s tips for avoiding problems!