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.

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors at a world-class life sciences lab are trying to change the way people think about their health.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Videos

Why Is Google Making Skin?

Hidden away on Google’s campus, doctors are changing the way people think about health.

Video

How to Build a Tornado

A Canadian inventor believes his tornado machine could solve the world's energy crisis.

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

Video

The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In