The model would operate given a different level of service of product for a larger amount of money, rather than the demand-based economic model proposed by coca-cola. People have been buying first-class plane and train tickets for a long time now, and it wouldn’t be unreasonable to expect an extention of this.

I can’t but help in all the learned postings on economics that customers emotions has been missed out of the picture.

Customers do react badly to being treated unfairly. It is one things to have generally accepted progressive taxation (providing it is not prohibitively progressive that is), or to manage demand (and thus yield) for airline seating capacity, but I sugggest it is another thing to openly price differently for products and services just because some customers are richer than others. For example, Amazon experimented with differentially priced CDs in the past with disastrous consequences.

Customers do not like being treated unfairly and will punish others, including companies, who treat them so.

Just a thought.

Graham Hill

Even the distributional consequences are not unambiguously bad for the egalitarians amongst us. As Grant points out, rich Stamford businessfolk have little to complain about if taxi drivers charge them higher prices than they do poorer customers. In many cases, allowing price discrimination moves gains from trade away from the most affluent customers and toward poorer customers and producers.

As for the dire consequences Seamus raises against peak-load pricing for transit, there are three reasons not to be too concerned. First, the marginal travelers during rush hour are probably not heading to work; they are making trips that could be rescheduled, but because they put a low value on their own time, they’d just as soon travel when it’s convenient for them. I don’t have a link, but I’ve read studies of auto traffic that show that a surprisingly low percentage of trips during rush hour are actual commuters. Second, peak-load pricing makes it possible to get accurate signals of potentially profitable additions to capacity, signals which are currently suppressed and so cannot stimulate new supply. Third, over a slightly longer time frame, workers and firms can adjust their locations to reduce travel times. All three of these margins of adjustment will mitigate or eliminate the postulated harms.

HOT lanes are all the discussion right now around Washington where the price of tolls will adjust to the amount of traffic. We already have different price schemes for Washington’s Metro based on whether you are traveling during or outside of peak hours.

So this is coming, but perhaps, differently than the rest of the world or at least Asia — which may be more used to these fluctuations.

Taking the broader view, and the economist’s assumption that consumers are rational, commuter trains are full to bursting because other transport options are slower and/or more expensive. Raise prices and some people will abandon the trains, making commuting by road slower for everyone.

Hypothetically we could then raise road tolls and even bus tickets until some people were actually unable to afford travel at rush hour by any method at all. Since in practice people still have to get to work (and home in time to collect their kids from school) that would probably mean manual workers, teachers, nurses and other lower-paid professions getting up early enough to commute in the small hours and miss the expensive rush. I’m not sure the benefit of more rationally priced rush-hour trains is worth the cost of inattentive buzz-saw operators and nurses too tired to reliably prescribe the correct drugs.

The sophisticated systems used by easyjet have a model (start cheap for early bookers, then rise, then fall again for last minute) but the prices are adjusted on-the-fly in real time.

I think it’s on-line sales, and the software, than enable the airlines to survive.

In Australia a couple of years ago, there was a major public uproar over the fact that retail petrol (gasoline) prices rise significantly every Anzac Day, Australia’s national holiday to honour the country’s war dead. Economists said that the reason was obvious — demand rises on public holidays because more people travel then, and thus so will prices. Non-economists said this looks like oil companies and retail outlets taking advantage of people on a day of national mourning.

What was clear in the ensuing debate was the mutual ignorance it revealed: Economists are fond of bemoaning the lack of economic understanding that (they claim) ordinary people have. But many economists too reveal a lack of understanding — of the non-monetary aspects of life, since they could not see why people would be morally offended by such price rises.

one thing though: as grant and i share a passion for the old masters, let me draw your attention to georg simmel’s “philosophy of money” – a dazzling analysis of the modern world at the turn of the 19th to the 20s century.
http://www.amazon.com/Philosophy-Money-Georg-Simmel/dp/0415341728

georg simmel was the son of a berlin entrepreneur who co-founded the Sarotti chocolate factory – the most famous chocolate brand in germany for a long time http://en.wikipedia.org/wiki/Sarotti (note: “Due to political correctness the moor hasn’t been carrying a tray anymore since 2004.” – …btw. a company i worked for in the 90s did the relaunch – http://www.peter-schmidt-group.de/ … so pc has finally reached germany – good to know…)

free from financial worries little georg spent his days in berlin looking at girls and at fashion, he witnessed the pulse of the growing metropolis and carefully took note. his writings on fashion are legend – so is his “The Metropolis and Mental Life”.

as a true son of the big city georg simmel never came up with a consistent theory. his essays dive deep into everyday observations. – “the philosophy of money” is the only exception. here he carefully draws an anatomy of modernism as a shift form a “subjective world” to an “objective” one. – extremely interesting to read today – as one could argue in simmel’s words that we are right now witnessing the pendulum swinging back (from the objective to a more subjective world).

_
i just found that “the philosophy of money” (in the new translation) is also available on google books. so if you have the nerve to read 500 pages online – here you go
http://books.google.com/books?id=WpY3cCFiJHgC&dq=georg+simmel+the+philosophy+of+money&pg=PP1&ots=PPWKdglEcv&sig=xb3H6d8x2mKJ3JS-aSOMlNCylQg&prev

enjoy!

http://en.wikipedia.org/wiki/Georg_Simmel

Peak-load prices more accurately reflect the cost of using a resource at a particular time. They can help shift travel away from the most congested times. Higher rush hour prices may also attract more taxi drivers to work at those times, also reducing the shortage. Even the Metro might add cars to its trains, if prices were right. This kind of pricing can generally increase social welfare.

Price discrimination (charging richer consumers higher prices to use the same service) depends on market power on the supplier’s part (monopoly power). A substantial portion of this kind of pricing power is merely a transfer from consumers to producers, without the same welfare-enhancing properties of peak-load pricing. Many countries have some restrictions on this kind of behavior through their antitrust laws or competition policies. (Although the regulations are not widely applied, particularly to services.)

To some extent, there’s a trade-off when we consider fixed versus flexible pricing. Fixed prices reduce uncertainty, information-gathering costs, bargaining costs, and other transaction costs. But, as your examples show, if prices don’t respond to changing circumstances, then other problems appear.