Thursday, January 3, 2013

Bundling, Moral Hazard and Holdup

American Airlines offers a lifetime of first class travel for a large up-front fee. Those who purchase appear to have dramatically increased the amount they travel. Did AA really not anticipate this?
The AAirpass system had rules. A special "revenue integrity unit" was assigned to find out whether any of these rules had been broken, and whether the passes that were now such a drag on profits could be revoked.

Paraphrase, Now that you have sunk funds into the pass, we want to limit what the pass entitles you to.

Hat tip: Jeff Smith

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