There’s been much buzz this week about Northwest’s plan to offer an aisle or emergency exit row seats for an extra $15 when you check-in. I think this is a great idea, of course – I would almost always be willing to spend an extra $15 for a better seat. And this isn’t something to feel guilty about – ultimately, in the hyper-competitive airline industry, differential pricing will result in lower base fares than would have otherwise been the case. So someone who couldn’t afford the ticket if all the seats were the same price might be able to just barely scrape together the money for a middle seat in the last row (which should be the cheapest seat on the plane. Although the back row aisle seat can be pretty awful too – people waiting in line for the bathroom like to lean against that seat while they wait, seemingly oblivious to the passenger sitting there, trying desperately to get some sleep…).
The only problem with pricing each seat is that you cannot properly value each seat statically. Yes, an aisle or a window is more valuable than a middle seat. But an aisle or window with an empty middle seat is yet even more valuable. Probably worth an additional 15–$20 beyond the initial premium. But how to price this? How about another option on the ticket where you agree to pay an additional amount if the middle seat remains open? The airline could then move middle seat passengers around to maximize the ‘bonus’ revenue from passengers who agreed to pay more for an empty middle seat.
There’s at least one big complication to all of this from an economic perspective. There could be more demand for a given class of seat (ie ‘exit row’ or ‘window with empty middle seat’) than is available at a particular price. The best way to address this issue would be to have an ebay-like auction, where each individual would specify in advance the maximum that they would be willing to pay, and then the system would effectively run the auction to determine who gets any particular seat, charging everyone seated in a particular class the market-clearing price for that class (ie the lowest bid that still won a seat). It seems unlikely that the airlines will be able to implement a system this complex anytime soon, but it would be pretty nice for all involved. (albeit there would be a slight learning curve for some people)
Posted by Stephen Bronstein at March 18, 2006 02:23 PM