ThinkProgress

A Better World Through Price Discrimination

Everyone outraged by Spirit Airlines’ decision to start trying to charge an extra fee for people who want to use the overhead bins — including Chuck Schumer who seems to be aiming for a quasi-regulatory solution or else a way to get on camera — should consider Paul Krugman’s argument that price-discrimination in monopolist-dominated markets is socially optimal. Here’s page 280 of his economics textbook, part of Chapter 7: Market Structure Beyond Perfect Competition:

This is a somewhat counterintuitive result to most people, but the argument is extremely convincing. You’re never going to have air travel meet the textbook definition of a perfect competition (there’s not enough demand on most routes to support a large number of competing airlines) so business-process innovations that help airlines think up more precise ways of tailoring prices to specific elements of consumer demand help advance human welfare.

Update:

To be clear, consumers are much better off in a world with competitive pricing than in a world with monopoly pricing plus price discrimination. The best thing to do, air travel-wise, is to do everything we can to promote robust competition. Periodic re-auctioning of airline gates and slots could help here, as could congestion pricing for runways. Of course my pet cause is to build more high-speed rail so that airports can be used for the longer-distance travel for which they’re ideal.