Originally Posted by pbarnette (Post 18720892)

Maybe I am confused, but why should we presume that said seat(s) would go unsold otherwise?

I could buy the argument that some elites would be willing to pay a premium to remain loyal and to maximize benefits. What I don't buy is that those elites make up a sufficient proportion of passengers for DL to charge that premium.

Originally Posted by pbarnette (Post 18720892)

Maybe I am confused, but why should we presume that said seat(s) would go unsold otherwise?

Originally Posted by pbarnette (Post 18720892)

I could buy the argument that some elites would be willing to pay a premium to remain loyal and to maximize benefits. What I don't buy is that those elites make up a sufficient proportion of passengers for DL to charge that premium. As long as DL must sell seats to non-elite passengers, they must set their pricing at a point which will attract those non-elite passengers. Elites buying during any period when DL is seeking to sell to non-elites will receive non-elite pricing - they will not pay a premium.

Originally Posted by Bicostal (Post 18721128)

Who said that?

You missed the point entirely - a consumer will make a purchase decision in an effort to maximize their utility - very simple premise and one demonstrated time and time again in the decision literature. If you understand the concept of utility you naturally appreciate the subjective rationality in decision making.

Second, in an effort to do this, the consumer will apply, to the extent necessary or desired (the disutility or cost associated with seeking additional information is the offset), the probability of the product having a benefit to their willingness (their expressed preference) to pay for that benefit.

The product with the highest perceive net benefit will be selected. Whether or not you would make the same choice as this consumer is irrelevant. Hence the statement of "irrationality."

When the combination of ALL benefits of two products are perceived equivalent, absent a price difference, the consumer will be indifferent as well.

Please remember, in the case of airline tickets, the consumer's choice set is not within but rather between airlines. Thus, if a flier perceives upgrade potential as "valuable" to them, and the net benefits of the choice (inclusive of the price difference, if any) of offering A exceed offering B, they will select offering A.

When the flier perceives the upgrade potential as less valuable (or in the case of a non-elite as non-existent), under the same paradigm, the choice may now favor offering B.

And that is why FCM can and will impact on Delta's business - and it has nothing whatsoever to do with discriminatory pricing.

As for the requirement of "discriminatory" pricing to effect a commercial benefit from elite programs - all I can say is - Wow.

Originally Posted by Thomas Hudson (Post 18720931)

ARe you of the economic theory that when people choose price and schedule vs their favorite airline that prices will be driven up or down?

Originally Posted by hazelrah (Post 18721175)

Of course your presumption is that there is choice. Not much of a choice at ATL, MEM, MSP, SLC, SE US, etc.

Originally Posted by pbarnette (Post 18721212)

I'm of the opinion that the airlines must sell tickets to those choosing on price and schedule. Accordingly, the individual choice you theorize has no impact on prices, even in the short term.

Supposing, however, that one airline managed to find a combination of services and product that made them the favored airline of enough people to fill their planes, that they might achieve some short-term revenue advantage. However, this would only be possible if that combination of services and product were available to all passengers. In the case of elite upgrades, the limited capacity in F makes this impossible - a DM might be willing to pay $100 because he is likely to sit in F, but the other 150 passengers are not.

Originally Posted by sethb (Post 18721076)

It's also a false concept.

A $500 ticket on DL with a 75% chance of upgrade is a better buy, for me, than a $400 ticket on AA with a 0% chance of upgrade.

A $400 ticket on AA with a 0% chance of upgrade is a better buy, for me, than a $500 ticket on DL with a 10% chance of upgrade.

If the pricing were the same, but the timing of the AA flights more convenient, the same would apply.

It doesn't matter whether DL charges me a discriminatory price (compared with someone who has no status with anyone and therefore no loyalty), a 75% chance of upgrade will gain them $500 revenue in this situation, and a 10% chance of upgrade will gain them $0 revenue.

Simple economic theory: if DL reduces the value to me of flying DL, then my incentive to fly DL is reduced, and the amount of DL flying I do will tend to be reduced.

Originally Posted by Bicostal (Post 18721161)

Data?

Originally Posted by pbarnette (Post 18721296)

Except DL isn't selling that ticket only to you. They are selling that ticket on the open market.

Originally Posted by pbarnette (Post 18721296)

Except DL isn't selling that ticket only to you. They are selling that ticket on the open market. And everyone in that market can't have a 75% chance of an upgrade. They have to set the price at the point where someone with a 0% chance of an upgrade will buy it.

Consider the 738. Only 10% of the seats are F seats. If the requirement for the revenue premium is a "high" likelihood of an upgrade, then the number of passengers willing to pay that premium must be limited, as increasing numbers willing to pay the premium decreases the likelihood of any individual upgrade. Using your 75% threshold and assuming an 80% load factor and no F sales, DL could count on somewhere around 16% of passengers willing to pay a premium.

So, DL is left selling seats to some, likely large, group of people that don't expect the upgrade. Since they don't know whether it will be an elite or a non-elite buying a ticket at any point in time, they must set the price at the point which attracts the non-elite.

Under your model, they may lose the $500 you were willing to spend, but the simple math suggests that they are better off selling the $400 seats. Even if we assume that people would pay the premium with a 50% chance of an upgrade, that would still only be 32 seats. There are 128 more seats to sell!

Originally Posted by mother- (Post 18721351)

...The average price someone gets for a perishable product with high fixed cost is directly related to how many people are interested in buying that particular product...

Originally Posted by pbarnette (Post 18201799)

I don't understand why it is so hard to understand. Chasing "loyalty" in a commodity business has led to 20+ years of losses. Sounds like a losing strategy.

I don't understand why it is so hard to understand the logic in selling products to those that, you know, pay more for that product. Does the gas station give discounts to the Hummer owner? By the "logic" of many on this board, they should.

Seriously, if DL needs validation for the strategy to ignore "loyalty", this board provides it. An endless parade of folks looking for something for nothing and objecting to any attempt to leverage any sort of premium pricing from elites. The lack of self-awareness provides entertainment value to those that understand economics, too...

Originally Posted by mother- (Post 18721351)

For craps sake would you stop with this already?

The average price someone gets for a perishable product with high fixed cost is directly related to how many people are interested in buying that particular product.

This is not like selling low fixed cost non perishable widgets.

Originally Posted by bubbashow (Post 18721636)

Basic business sense seems to be lacking on FT. PB....they will argue until they are blue in the face that their miles and miles of LUT fares are worth more than the poor guy having to buy at the last minute. DL did change the game, and as a shareholder, I am glad they did. It may cost me a free upgrade now and then, but I never lost sight of the fact that was a losing game for DL.

Originally Posted by pbarnette (Post 18721296)

They are selling that ticket on the open market.