A Hiccup in a Price War

Many antitrust economists are wary of the efficacy of predatory pricing, the strategy of pricing below costs to drive a competitor out of a market. The usual counter-argument is that, for it to work, the inevitable losses this will entail must be recouped after the rival has exited. Recoupment requires higher prices ... that can attract rivals again. Additionally, there are many tactics the prey can implement during the predation phase to try to thwart the predator.

A new one to me is giving away booze. As described in an article for Southwest Airlines 50th anniversary, Southwest pioneered frequent, cheap flights within Texas in the 1970s. In 1973, Braniff and Texas International started a price war offering $13 tickets. This was below Southwest's costs and were intended to drive Southwest out. Southwest countered with two-tiered prices. They would match the $13 price but also offer a $26 price that included a fifth of liquor. Most of its customers were business travelers who would expense the $26 ticket and keep the liquor. Since the liquor cost Southwest less the the the difference in the prices, it made more on the $26 tickets. Few of its customers opted for the money losing $13 tier. And, of course, the publicity of "free booze" was priceless.

Demand for Metro Rides to FIFA Matches is Inelastic

A recent Forbes article helps explain why getting to FIFA World Cup matches by will cost spectators $150 just for the metro train to get to the stadium. One contributing factor is that demand becomes more inelastic when it is a complement. Fans who have already committed to travel, lodging, and match tickets may have already budgeted $5,000 for the event. What’s another $150? The World Cup in NYC is a once-in-a-generation event for many attendees, and transportation costs are a small share of total trip expenditures. Combine that with few viable substitutes ways to reach the stadium and you have a market where consumers are effectively “captive.” Under these conditions, even large price increases result in only modest reductions in quantity demanded, allowing providers to charge prices far above normal levels.

From a pricing perspective, mega-events shift firms toward the region where optimal markups are high because elasticity is low. The inverse elasticity rule implies that when consumers are less price responsive, firms (or cost-recovering public agencies like NJ Transit) can pass through more of their costs without losing much demand. The $150 fare is therefore less an aberration than a predictable outcome of event-driven economics. The broader lesson is that mega-events elevate willingness to pay for complements, making demand more inelastic.