American Airlines should read chapters 19 and 20. They sold 64 lifetime AA passes for $350,000 that allowed passengers to fly first class, anywhere, at any time. This was a big mistake:
Bottom Line: The passes ended up costing AA over ten times as much as they sold them for.
HT: Don Marron
- Adverse selection: only extremely travel-inclined passengers purchased the tickets; and
- Moral Hazard: since the marginal cost of travel was zero, they used to fly to any destination where the marginal benefit was greater than zero.
Bottom Line: The passes ended up costing AA over ten times as much as they sold them for.
HT: Don Marron
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