With the news that American Airlines will increase its baggage fees starting August 14, 2009, I thought it might be nice to have a little note on airline pricing. It is well known that passengers on the same flight will often pay wildly different prices for the same trip. These prices differ by when you purchased, where you purchase, when the return flight is, how you paid, and many other dimensions. Airlines do this because they engage in a pricing practice called price discrimination.
Price discrimination stems from the fact that airlines are not perfectly competitive. Instead, unlike the market for cereal, there are only a few carriers — even fewer at any given airport — and they only go at certain times of the day to certain destinations. Couple that with the fact there are severe financial and regulatory barriers to entry for potential competition, and the result is that airlines have a decided advantage when it comes to choosing what price you get to pay for the privilege of flying with them.
Airline Pricing and Baggage Fees
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