I’m a big fan of economic freedom. The freedom to buy and sell what I want, and to not buy and sell what I don’t want. And this is more than just a thinly veiled support of the free market. Private corporations make you buy things you don’t want all the time.
How many of you have television service? You probably pay a cable subscription in exchange for a ton of channels. But how many of those channels do you watch? If you’re typical, probably not more than a dozen. So how is it fair to make you pay for over nine thousand channels when you only watch a handful? This is called bundling, and the folks over at Marginal Revolution talk about it all the time. Or, more precisely, they talk about unbundling.
See, the main purpose of bundling is to socialize the costs of niche products. So for example, you may only watch prime time mass market comedies on mainstream channels (actual cost: pennies), but you’re still charged the same $80/mo subscription fee as everyone else. Meanwhile, your neighbour might be a massive fan of ESPN (actual cost: a ton in licensing), but unwilling to pay the full cost of subscribing to it. In a world where each of you were charged only for what you use, you would pay a couple bucks a month, and your neighbour a couple hundred. But, of course, in that world, your neighbour would balk, cancel his subscription, and no sports would be watched. Thus, Shaw overcharges you to subsidize your neighbour, everyone gets more TV, and Shaw gets more money.
Economists though, don’t like this. As one of the normative beliefs they whisper between their catechism of impartiality, they’ll tell you over drinks that everything that can be unbundled, should be unbundled. Because, in effect: it’s not fair to make one person pay for someone else’s consumption. In the perfect world of frictionless economics, the market would hit equilibrium where peoples’ willingness to pay matches suppliers’ willingness to produce. S/D curves 101. By unbundling products, allowing each person to mix and match and pay for only what they want, each person has their resources freed up to better achieve their goals and priorities.
A while back, I was on a date with an AnCom activist from California. This was a bad idea, I know, but the spirit was willing and the flesh was weak. We were talking about air travel, as you do, and I mentioned that one of the things I missed about living in the States was cheap air travel. Air travel deregulation in the 70s is one of the greatest victories of free market economics. It’s why flying in the US is so much cheaper than up here, and it opened the door all sorts of other unbundling of the various aspects of flying. I don’t know about you guys, but I love it that wealthy businessmen pay $50 for priority boarding. It makes my flights that much cheaper.
The AnCom saw things differently. She raised as a counter-example Frontier Airlines. Frontier Airlines is the best example of airline unbundling. Their base fares are extremely cheap, but they charge for everything. $25 for a carry-on item ($50 if you don’t pay ahead of time). Selecting a seat at all carries a fee. In-flight drinks are not free. She saw this as a terrible example of an evil corporation squeezing every last profit out of their customers.
I protested. Gripe as you will, Frontier is knocking it out of the park with this. It turns out, given the choice, people would rather have a cheaper flight. Maybe for well compensated software professionals like myself, saving the $25 by not checking a bag doesn’t matter. But for poorer folk, it can make all the difference. To them, $25 can be the difference between flying at all. And insofar as people are voting with their feet, they seem to love it. For all that people complain, as NPR Planet Money reports, Frontier is seeing amazing success. People are freed up to only pay for what they need, and to save money when they don’t. How is this possibly a bad thing?
Her response, in a nutshell: This is predatory. People are lazy. People are stupid. They see the base fare and assume that’s the cost. They don’t bother to (for example) notice the $25 carry-on fee. And then when they show up at the gate, they’re not only charged a fee, but slapped with a “penalty” (Total fee $50) for their ignorance. This is grossly unethical and must be stopped.
This is an interesting complaint. On the one hand, I am objectively correct. Frontier Airlines is the fastest growing airline. Ignore the complaints; people demonstrably value this pricing structure. But she has a valid point as well. There are no doubt people getting burned by this, and since they’re people flying Frontier and not Virgin, it’s a safe assumption that they’re not likely in the best position to afford it. I thought on this, and I came to a question.
Grant for the sake of argument that this is unethical. Is there anything that could be done that would allow Frontier to keep this pricing structure, while not being unethical? Could they, say, communicate this better upfront? Do the Uber surge price thing and make you confirm that you accept it? Are there certain things for which this is intrinsically unethical, and others for which it’s not? What is the specific threshold at which this practice becomes unethical?
Of course, because she’s an AnCom, her answer is somewhere in the realm of “making me pay for a flight at all is wage slavery”, and so that’s not a fruitful line of inquiry. But lets prax this out. What is the root cause of the problem? The root cause of the ethical problem is that, uncharitably paraphrasing her comments, people are too stupid to reason through this. The corporation on some level knows this, and takes advantage of it.
The customers are stupid, and therefore the corporation is responsible for accommodating them. It sounds strange when phrased this way, but I suspect that most peoples’ instincts fall along these lines. But… why? We take it for granted that a corporation has an ethical responsibility along these lines towards the general public. But what is the general public’s ethical responsibility in return? What level of competency is it ethically acceptable for a corporation to expect from the public? What are the requirements for a minimum viable citizen?
This rarely gets discussed. When it does, it’s usually assumed as a background fact and taken for granted. Progressives and left-wing reformers generally assume that everyone is helpless, and push to accommodate the lowest possible common denominator. Libertarians like to hand-wave it all away with “voluntary exchange”, pushing 100% of the personal responsibility onto the individual. What is the “correct” value? I don’t know, and I’m interested in hearing your accounts of this. But I think it’s critically important that this discussion gets had.
We live in a world where technology is growing at an unimaginable pace. Things that seemed miraculous a decade ago are trivially commonplace now. But as technology progresses, our society becomes more complex. The cost of using these technologies is rarely zero. They all depend on some element of learning. They all hold some basic expectations on their users.
Some people, like the AnCom, find these expectations intrinsically unethical. But along that path lies ruin. Taken to the extreme, that reasoning would suggest that cars should be banned, because it’s too hard for horse riders to learn how a steering wheel works. That would be nuts; clearly the invention of cars has been an enormous boon for humanity. And yet… there are no doubt some people out there for whom driving is too challenging, and a country that expects people to have the ability to drive, is a country in which they cannot be first-class citizens.
But on the flip side, expectations of arbitrary responsibility don’t work either. Back when I lived in San Francisco, it was impossible to find housing. What I, and many other tech people did, was script Craigslist. I had a recipe on IFTTT set up. Every fifteen minutes it would scan Craigslist for new rentals in my desired neighbourhoods and price ranges. It would automatically reply to them with a brief introductory email, and CC me so I could review them and follow up on the promising ones. In this market, this was a necessity. And yet, a market that expects this behaviour of its participants is a market where the vast majority of humanity is excluded by default.
As technology progresses, it will entail ever-rising requirements for people to make use of this technology. Some people will be able to. Some people will not. If we sit here and do nothing, sticking our fingers in our ears, inequality will increase, as the people who can handle the vagueries of Frontier-style pricing economically dominate the people who can’t read the fine print. If we insist on 100% accessibility and inclusion for everyone, we’ll end up with a stagnant society that can never innovate.
If we spoke openly about this, we could discuss the merits and drawbacks, balance the tradeoffs, and set a standard. We could then innovate with that expectation, freeing us from having to worry about every corner case. And we could work to prepare people for that, holding standards for them and supporting them in the process of achieving those standards. But the closest thing to a discussion of this that I’ve ever seen is David Chapman’s Meaningness blog, where he talks about the critical task of leveling people up to a stage 5 mentality. Unfortunately, the only people familiar with his work are people like us, the people who don’t need it.
So what makes for a minimum viable citizen? What expectations of peoples’ ability is it reasonable to hold? Are people even able to rise to these challenges? How can we support them in it if they can?
Well, this ties into the last post here, doesn’t it? Is it fair to expect constant paranoia and savage skepticism when reading pretty much anything as a price for being even halfway decently informed? And it is not just a question of ability: there’s only so much time and effort one can spend in a day. I put it to you that unbundling _everything_ would increase the cognitive burden of day-to-day life and lead to decision exhaustion pretty damn quick: If the cost of a flight is set as a unit which includes the usual things (access to a bathroom, something to drink, especially now that you can’t bring liquids along, room for your luggage, that sort of thing) all I have to do is search for it, sort by price and there I go.
If all the costs are there and all the costs are varying, then you have to develop an expected-flight-costs model and calculate and update it with various pricing schemes which (as the mobile phone industry has conclusively shown) can be damn near arbitrarily priced. And sure, if you are clever you can do it, but even if you are clever, you need time and effort to do this, time and effort that you may not have.
And all the company has to do is to set up a pricing scheme that’s attractive at the outset but contains secret fees and set its complexity just high enough that a sufficient number of people gets screwed. And an organization with time and manpower to throw at the task can always win in this sort of fight: they can persist longer and be more complicated than you can.
Consider your basic deal with a bank that comes with many, many pages of incredibly fine print written in a language almost entirely but not quite unlike English. That’s really setting out a relatively simple deal, really, just written in the most obfuscating way possible. Or consider various laws and international deals that we are all supposed to vote on: the WTO agreement is something like 700 pages and is _hilariously_ unreadable. The PATRIOT act comes in at a svelte 132 pages, but is written like a goddamn patchfile which means that figuring out what it does requires an extensive law education and several months of hard work. And, of course, as it the case with TTIP and TPP, the text is even secret as an ultimate obfuscation.
So, really, you need to consider the cleverness threshold _and_ the time threshold and then multiply it by all the complex moving parts of living in a technological society. Yeah, people are uninformed, but, honestly, if you stop and think, _of course_ they are. Being completely informed is _at best_ a full-time job for someone really rather clever. We all rely, I think, on the kindness of strangers and their unwillingness to go full-out in deceiving us, and it may be profitable to investigate what sort of social integument is allowing for this kindness in contravention of self-interest, and if we are slowly chewing through it.
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I’ve heard detractors of ancapistan indicate such. There would be so many contracts to sign and fine print to read between your grocer, defense organization, and bank that we would all be bogged down by red tape and unable to do anything. Government, they say, helps streamline certain things like roads to lowest common consumer.
As far as bundling goes, some bundling helps stop market failures. Radio bundling programs with advertisements. Frontier bundling flights with nickle and diming.
I think technology via bundling will help solve more public good market failures in the future like fireworks and defense.
This is entirely in the realm of sci fi speculation, but:
> There would be so many contracts to sign and fine print to read between your grocer, defense organization, and bank that we would all be bogged down by red tape and unable to do anything. Government, they say, helps streamline certain things like roads to lowest common consumer.
I would expect free market aggregators to pop up. After all, organizations like that already do. Consider Apple vs PC manufacturers. To build a PC, you need to get all the parts yourself from different vendors, you need to have all this understanding, you have to know what you’re doing, etc. With Apple, you walk in, say “computer me”, pay them ~30% more than you would for a comparable PC, and walk out.
I’d expect there to be a lot of Apples in ancapistan
Especially @Simon Penner (I can’t seem to reply, possibly due to a nesting limit):
You can have aggregators of all the deals and agreements you need to be party to for civilization to work (which is an astonishing amount—it’s really profitable to corner some engineer working at a little-regarded field at a social occasion and go “So your job’s simple, right?” and you get a beautiful core sample of the fractal complexity of a technological civilization), certainly, but that just means that Ancapistan will slowly, laboriously, recreate the state.
Switching computer platforms or electricity providers or things like that is already tortuous enough: I suspect switching your State Inc. will be even worse.
 And is made as difficult as legally possible by the companies providing that service. Consider Microsoft in the 1990s and how fun switching away from office was back in the day. I can, since we are imagining SF scenarios, easily imagine “All your contracts are written based on a legal framework which is variously a trade secret, proprietary, copyrighted, and patented. Attempts to reverse-engineer it are infringement, and _our_ legal team says that canceling at this time renders you liable for penalty fees in excess of $1000 000 000 Ancap Gold Quatloos™.”
This isn’t just about stupidity/laziness. There are cases where bundling is a net benefit even with perfectly rational customers. Let me give you an example:
Suppose there are five customers A, B, C, D, and E (or equivalently five types of customers). Customer A really likes channel A, B really likes channel B and so forth. Channel A is worth $10/month to customer A while channels B, C, D and E are only worth $2/month to customer A (similarly channel B is worth $10/month to customer B etc..). However, it costs $11/month to produce the programming on each channel.
Now suppose the cable company offers to sell these channels in an unbounded fashion. If they price channel A at anything less than $2/month all the customers purchase it for a total revenue of < $10/month for channel A which would be unprofitable. If they price channel A between $2 and $10 a month then only customer A finds it worthwhile to purchase the channel (for at most $10/month) so again there isn't enough revenue to fund the programming on channel. If they try to price channel A at < $10 per month no one buys it. The same goes for all the other channels and no one gets any television channels.
On the other hand suppose the cable company comes along and offers to sell each customer the bundle of channels A-E for $12/month. Each customer gets a value of $10/month (for their favorite channel) and 4* $2/month = $8/month from the other channels so all the customers take the deal (for net consumer surplos of $6/month * 5 people). The cable company gets $12/month from all 5 customers which lets them pay the $11/month programming cost for each of it's 5 channels along with a $5/month profit (for a total surplus of $35/month extra value).
So, NO economists won't tell you that bundling is always a harm. In fact it can, somewhat counter-intuitively, create value.
What's really going on here is the following thing. Television (like all information products) has a high fixed cost to produce and essentially 0 marginal cost. Ideally, one would be able to fund the production of information products by having each consumer pay proportional to how much they value the product but one can't determine this. By grouping all the television channels together one effectively averages over the preferences of the different customers allowing one to find a price that works to everyone's advantage even though no such unbundled price is possible.
Sorry it should be ” If they try to price channel A at > $10 per month no one buys it” I accidentally used
There are non-bundled solutions to your specific toy example that work, though. For instance: access with no channels costs $8, channels cost $2 each. (Or other values that leave some of the surplus with the consumer.) This produces the same result (total channels purchased, total price paid) as your solution. However, if the values of the channels vary per-customer, it might work better.
And in fact sometimes we see models a lot like this, where the upgrades are fairly cheap in comparison to the base service.
I’m curious whether there have been studies comparing these sorts of solutions generally, and which are better under what circumstances.
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That’s not an example of non-bundling. The $8 is a bundled charge to get access to any of the channels. The $8 doesn’t represent any fixed cost of connecting the customer to the network or anything it is just the bundled part of the cost separated out. You might as well have simply said access with no channels costs $11.95 and access to each channel costs $.01.
Whatever names we want to call it the point is that sometimes consumers (and producers) benefit from aggregating several services together and charging a substantial base fee to access any of the component services (which are then either free or very cheap). Ultimately, the only reason your solution works is that it packs so much of the price into the base fee that every customer buys all the channels. Indeed, if we had (as is quite reasonable) customers whose value they get for a channel varied down to 0 (as my value from the gold channel is) one could push down the cost that an upgrade model could charge to an arbitrarily small value.
I suspect we will find that simply because of transaction costs and the burden of decision making that in these situations it often behooves people just to buy them all as a bundle rather than paying a base fee and then a small upgrade fee for each service consumed. However, I don’t really care to argue that point. The upshot is that it isn’t always bad to take a package of services and charge a fee to have access to any part of the bundle.
Anyway, this doesn’t really reflect on your larger point which is about what level of rationality/concern for the future we should assume in our population.
No, MVC stands for Model, View, Controller. Get it right. 😛
I think a lot of this reaction to pricing schemes like Frontier’s is psychological based on the presentation.
Yesterday I was shopping on jet.com, whose pricing model is that everything has a base price, and this price only goes lower. You can opt out of features such as the return policy, paying with a non-debit card, etc. to save some money on each item, and buying many items at once decreases your total price as well.
I bet that if there were the _exact same prices_, but presented in the opposite direction–you start with the low price, and then add features like return policy, paying with a credit card, etc. a la carte–people like the AnCom would see this as Corporate Money-Grubbing, akin to charging for ketchup and glasses of water in a restaurant when these are nearly always presented as free. I say this is psychological because the cost is obviously always there, and typically subsidized by people who don’t use ketchup or order water, but it seems outrageous when it’s a separate cost to the customer, since the customer wouldn’t notice if the cost of everything was a couple cents cheaper and didn’t include water and ketchup.
Unbundling by having more things be opt-out still isn’t perfect, since there are always people who fail to un-check the checkbox for a FREE YAHOO TOOLBAR e.g., but it does at least succeed as presenting the deal as “you can save money by not subsidizing things you don’t use” instead of “you have to pay extra money for things you assumed would be there”.
Another downside is that the company probably wouldn’t be able to advertise at the lower price–“this costs up to $10” doesn’t grab as much attention as “starting at $8”.
I’ve had fun speculating about an alternate universe where Uber presented surge pricing this way. Start with a really high base price but then say “you qualify for an X0% discount due to low traffic volume”
We’ll never know
Peter and Milo eloquently made the two obvious arguments: economy of scale effects may make bundling beneficial to consumers, and unbundling benefits can be communicated non-deceptively.
Perhaps more generally and in response to your deeper and speculative question, ethical business should always operate non-deceptively, i.e. it should not deliberately exploit an information differential about the value and cost of the product. Even as a customer with limited access to information or limited capacity to process it, I expect to be treated by you in the same way as you would want to be treated in my situation.
Having lots of unbundling, though, does tend to make life more stressful, as you’re always having to make decisions about which options to pick, and worrying about accidentally running up a huge bill (as sometimes happens with such things as international data roaming). There’s more peace of mind in getting an “unlimited” plan, even if that actually works out to be more expensive for your own normal usage, since you’re not compelled to constantly monitor your usage to see if you’re within the limits of a plan that socks you with extra fees if you exceed them.
Not necessarily. An unexpected monstrous bill becomes impossible in an environment where service and payment arrangements are specific, limited, and capped. You might end up being told that you’ve exceeded your authorized charges and that you need to authorize a further expenditure before service can be provided, but you won’t end up bankrupt.
To a certain extent, an unlimited plan’s “peace of mind” is merely the absence of worries engendered by having chosen a contract with an inappropriate upper liability limit.
So you trade worries about getting hit with an unexpected bill for the nuisance of having to authorize added expenditures, possibly going through lengthy clumsy checkout procedures, digging out credit cards, talking to (and getting put on hold by) customer service people, and jumping through security hoops, usually when you’re least able to handle it (like when you’re out on a street in a foreign country trying to use your mobile phone).
You’ve got two different issues here.
In a world where each of you were charged only for what you use, you would pay a couple bucks a month, and your neighbour a couple hundred. But, of course, in that world, your neighbour would balk, cancel his subscription, and no sports would be watched. Thus, Shaw overcharges you to subsidize your neighbour, everyone gets more TV, and Shaw gets more money.
What would actually happen if the sports package was priced so high that it did not bring in enough viewers? It would drop in price.
That’s a *good thing*. Sports packages are artificially inflated. And ESPN is just one side of what Disney does.
The other side? They don’t charge you, the user, to use their sites. They charge ISP’s to let the ISP’s customers use their sites. If you get internet service from an ISP that doesn’t pay Disney’s ransom fee? Then you can’t use the Disney sites, and you wind up complaining about your ISP. The ISP is basically forced to pay, and Disney gets (effectively) a tax on all users of the internet.
That should be addressed by net neutrality, but it isn’t.
#2. Airplane fees.
The real issue is two fold:
1. Charging a $50 fine/fee to make last second changes if you were unaware of the other charges (this is news to me, by the way).
2. Not being up front about the other charges.
If you saw an airplane flight on TV advertised for $99, but found that you had to pay $225 because of add-ons, would you be upset? Probably as upset as people who see a car advertised, with “Starting as low as 14,900”, and then in small print on-screen, “As shown: 24,995”.
In other words, this is already done, in large amounts. Airplanes are just the most annoying/visible spot for this. And this “charge extra for fees” isn’t new even in airplanes, it’s just that this company has gone an extra distance in doing this fee.
The real problem is not being clear about the *TOTAL out the door* price.
When you go shopping on an air travel web site, and compare prices for a dozen flights, what happens? Being $1 higher than the competition for the airfare makes you effectively unseen.
But these travel sites don’t actually list the actual final price — there’s fees, surcharges, “fuel sucharge” (seriously, how is that not part of the air fare?), etc.
This is the key point. Companies should not be able to show something, imply something, and get away with a very visible low price, and a hidden, hard to spot real price.
> The customers are stupid, and therefore the corporation is responsible for accommodating them. It sounds strange when phrased this way,
No. The corporation is hiding the true cost, and the customers are ignorant. Not stupid, ignorant. The corporations should be responsible for making the total price of their service clear.
A better alternative? Instead of saying “The cheapest cost is X, and you can raise it up with more”, how about requiring “The most expensive cost is Y, but you can make it cheaper”?
Can you imagine that? Having to say “If you get everything, and no one does, you’ll pay $39,000 for this economy car, but you can get it for less”. “If you are going to check 4 bags, carry on 2 more, and get food service, this flight would be $499, but you can spend less”?
What corporation would like that? Answer: One that has a lower max price, perhaps fewer discounts, and a smaller max — like a grand total of two bags max, only one of which can be a carryon (the other must be checked). And, isn’t that how airlines used to be? All the options on cars — didn’t they used to come with much fewer options? Heck, having a dozen different “add-on” packages for TV — didn’t it used to be “one set of channels”?
That’s just it. These new ways of advertising result in a lower advertised base price, so that people think prices are going down until they actually use these services, and a higher top price. More apparent viability, and higher net income. No wonder corporations like this.
The answer is better transparency, better “you must reveal your true price to consumer” regulations.
But oh no, “more regulations” are bad. Regulations are bad, bad, bad. Laws are good, but regulations are bad.
Sorry. I got a bit carried away at the end.
See An immodest proposal, perhaps. Upper two thirds of your generation.
Unbundling sports might expose the possibility that the product, at least for pro sports, is grossly overvalued.