In-Flight Wi-fi Price Discrimination

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.

Presented by

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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