Why do senior citizens get so many discounts? A lot of it is because they have the time to shop for bargains — so if you don’t give them a bargain, they’ll find someone else who will.
We talked about this and other forms of discounting (or, in economic jargon, “price discrimination”) in my Principles class just last week, emphasizing that it does no good to hand out discounts willy-nilly; instead you want to target them to the most price sensitive customers. That’s why you sometimes have to jump through hoops (like filling out a rebate form) to get your discount — the customers who are motivated to fill out a rebate form tend to be exactly the same customers who are most likely to look elsewhere for a good price.
We talked too about how the airlines have always strived to separate business travelers from leisure travelers so they can charge the business travelers more and the leisure travelers less — the leisure travelers being more likely to take the train (or just stay home) if they don’t get a bargain. The problem, though, is that it’s hard to tell who’s a business traveler and who’s a leisure traveler. So historically, there have been devices like discounts for those who stay over a Saturday night, which is something a business traveler is unlikely to want to do.
Now I can go back to my students and tell them something about the value of staying awake in their economics classes. Because someone who’d obviously absorbed this lesson well has started a new site called GetGoing that takes this idea and runs with it. Here’s how it works: You book two conflicting itineraries, say a trip to San Francisco and a trip to Atlanta on the same date. You are quoted prices that are typically about half what you’d get elsewhere. You agree to fly. And then it books one of the trips, chosen randomly.
Why is this profitable for the airlines? Because no business traveler is willing to risk landing in Atlanta when he’s got a client to meet in San Francisco. So the site can use discounts to lure lots of new vacation travelers without worrying that high-paying business travelers will try to claim those discounts. They even explain all this, right on the front page.
This really is a beautiful application of some pretty elementary economic theory to what I expect will be a highly profitable enterprise. I only regret that my timing was off in two senses: I learned about this a little too late to incorporate it into my Principles lecture, and a little too late to beat Alex Tabarrok to the punch.