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.


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.