39 Pages Posted: 2 Nov 2016 Last revised: 22 Mar 2017
Date Written: March 21, 2017
A claim that has been repeatedly made in the popular press is that airlines overly squeeze their economy customers in narrow seats to extract higher premiums from their business and first class travelers, implying this practice hurts consumer welfare. However, merely comparing the legroom of economy, business class, and first class seats is not sufficient evidence for this claim, as the socially optimal legroom allocation should also contain some degree of inequality. To rigorously scrutinize this claim, we build a model in which a monopoly airline chooses the legroom of each seat in an aircraft upfront, and then dynamically updates the seat-pricing menu for a flight up to its departure to maximize profit. In a counterfactual scenario, a social planner goes through the same process to maximize total welfare. Solving this model for both agents, we find that lower-class seats indeed obtain less legroom than socially optimal, but what happens to higher-class seats depends on the specifics: When the total amount of legroom can be endogenously chosen, the monopolist airline under-provides legroom to all seat classes (including high-class seats). When the space capacity is constrained (fixed aircraft length), the monopolist over-provides legroom to high-class seats.
Keywords: Optimal Seat Pricing, Revenue Management, Welfare Analysis, Capacity Planning, Capacity Allocation
Suggested Citation: Suggested Citation
Stamatopoulos, Ioannis and Tzamos, Christos, Optimal Seat Pricing with Multiple Classes & Why Economy Seats Feel So Small (March 21, 2017). Available at SSRN: https://ssrn.com/abstract=2862490 or http://dx.doi.org/10.2139/ssrn.2862490