In-Flight Wi-fi Price Discrimination

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Daniel Indiviglio poses the problem of pricing in-flight Wi-Fi.  This is part of a class of problems in which fixed costs are high but marginal costs are low.  In the economics literature, it is known as the "Disneyland Dilemma," from a classic article by Walter Oi.

What the airlines will want to do is try some form of price discrimination.  They want the power user to pay a high fixed cost and low marginal cost.  Thus, you may have a "frequent Wi-Flyer" plan, where if you pay, say, $40 a month, you can have unlimited in-flight Wi-Fi.  The airline wants the low-frequency user to pay something, so they might pay $5 for half an hour.

I am not saying that this particular approach will work.  But the idea is to come up with a scheme that maximizes revenue from all sorts of users.  If you don't offer the volume discount, then the power user who takes four flights a month may just pay for half an hour of Wi-Fi per flight, and you only get $20 a month from them instead of $40.  On the other hand, if you only offer the $40-a-month plan, you don't get any revenue from the folks who would pay $5 to be able to check email a couple times.

Anyway, it's a complex problem, but my prediction is that there will be multiple pricing plans.

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Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.
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