"No change fees" as a way to capture consumer surplus

[nsx]

Consumer surplus is the excess of value to the consumer over price. Businesses try hard to price their products in a way that captures higher prices from customers who are willing to pay more, while allowing lower prices for customers who value the product less. How can businesses do this? By setting up hurdles that price-conscious customers will happily jump in order to get the lower price. The more time and effort that you need to expend to get a low price, the less likely that the customer who was willing to pay more will make the effort to save money. In summary, deals come to those who pay attention. This is true of all kinds of businesses.

Now consider my recent experience booking a trip for relatives on Southwest. This was a short trip, not worth using awards on. I had several months' advance notice. Here's what happened (so far):

1. I checked Southwest and other airlines. Other airlines had a slightly better price, but Southwest tickets give you the option to rebook if the fare decreases and pocket the entire difference as a travel credit. I figured this was worth more than the 10% fare difference. This turned out to be more right than I would have imagined.

2. I booked the round trip at $300 per person, but we quickly decided to move the outbound flight a few hours and save $45.

3. The outbound flight never got any cheaper, but cheaper return seats kept appearing. I split the reservation and moved them one by one to the lower fare over a week or so.

4. Six weeks before the travel date, an even lower return fare appeared. (Thanks, ftnoob, for your post showing how to check fares with one click!) Another $20 per passenger saved.

5. All of this occurred without any Ding fares, although I checked those too. Less diligent "buy and forget" customers missed out on the fare decrease.

My final price is $195 per passenger, saving $65 on the return. Had I booked another airline I would have saved time but we wouldn't have saved $110 per passenger. There's still time for a Ding sale to appear and save some more.

Southwest has made saving money into a game that I enjoy! Getting back to the title of this thread, if the idea is to charge different prices depending on how price-sensitive or diligent the customer is, Southwest is doing a great job.

[lougord99]

Originally Posted by nsx

Thanks, ftnoob, for your post showing how to check fares with one click!

[MikeMpls]

Since Jan. 1 I've recovered $475 by refaring & taking advantage of Ding! fares on 5 itins for two people in March - May.

[Connected1]

The change fee vs. no change fee topic is interesting for lots of psychological and economic reasons. No question about it.

As for the particular economic concept you invoked -- were you willing to travel at the $300 price? If so, isn't WN doing the opposite of reducing the consumer surplus?

[MikeMpls]

I'm always willing to travel at the initial price I pay for WN tickets. If I don't like the up-front price, I keep looking. Case in point -- a June trip to NYC. WN thru ISL on those dates just wasn't competitive with CO thru EWR.

Recovering another $54 last night by refaring some May-June flights.

[nsx]

Originally Posted by Connected1

As for the particular economic concept you invoked -- were you willing to travel at the $300 price? If so, isn't WN doing the opposite of reducing the consumer surplus?

I was willing to RISK paying $300 in exchange for the chance to pay less if and when lower fares appeared (and in exchange for the ability to cancel the trip without penalty). In other words, Southwest get $300 up front because of its lack of change fees. If Southwest's change fees were the same as the other guys, I would have chosen the other guys, who had a lower fare initially.

Making customers work for a discount is a technique that companies use to improve their ability to capture consumer surplus. It is not perfectly efficient and therefore does not eliminate the consumer surplus in all cases. However it works much better than pricing policies that do not reward customer effort.

[Connected1]

Gotcha...so, in other words, what you initially purchased was a $255 fare and $45 put option at a strike price of $300 store credit. Your alternative was a $255 fare with a $150 put option at a strike price of $255 store credit.

[nsx]

Originally Posted by Connected1

Gotcha...so, in other words, what you initially purchased was a $255 fare and $45 put option at a strike price of $300 store credit. Your alternative was a $255 fare with a $150 put option at a strike price of $255 store credit.

Yes. Thanks for the clarification.

Now at least options traders can easily grasp the strength of Southwest's lack of change fees.

[toomanybooks]

Originally Posted by Connected1

Gotcha...so, in other words, what you initially purchased was a $255 fare and $45 put option at a strike price of $300 store credit. Your alternative was a $255 fare with a $150 put option at a strike price of $255 store credit.

Someone needs to develop a market in WN CDOs. I can visualize the tranches now.

[Connected1]

Originally Posted by Connected1

Gotcha...so, in other words, what you initially purchased was a $255 fare and $45 put option at a strike price of $300 store credit. Your alternative was a $255 fare with a free put option at a strike price of $105 store credit.

FIFM

[nitro]

Originally Posted by nsx

Yes. Thanks for the clarification.

Now at least options traders can easily grasp the strength of Southwest's lack of change fees.

How do baggage fee's fit into the trader vernacular?