Knowledge Problem

Michael Giberson

Leigh Caldwell, at Knowing and Making, notes concerns raised by representatives of India’s government about unfair airline prices during the festival of Diwali.  Caldwell mostly ignore the government’s chatter about unfair prices, but wonders how consumer reactions may influence company pricing decisions over time.  I think he offers interesting speculations, but I think that consumer price expectations won’t work in the way he thinks in the relatively dynamic air travel market in India.

The Financial Times reported (via GulfNews.com):

India’s government has warned domestic airlines that it intends to crack down on “predatory pricing” after carriers sharply increased fares on popular routes during a recent festival, as overall passenger traffic surges.

Indian travellers were outraged during the recent festival of Diwali — Hinduism’s biggest gift-giving holiday — when some carriers charged about Rs25,000 (Dh2,000) for a last-minute Delhi-Mumbai round trip ticket, a route on which fares usually range from Rs10,000-Rs15,000.

Fares on other popular routes also surged during the holiday period, as local airlines sought to cash in on a newly buoyant market.

“This predatory pricing can’t be allowed to continue,” Praful Patel, the civil aviation minister, said at an industry conference in New Delhi on Thursday. “We shall try our best to bring discipline.”

Caldwell tried to assess how consumer perceptions of price fairness will affect the market. Caldwell said:

In any case, like all suppliers, Indian airlines must keep an ear open to what their customers regard as fair, but need not pay too much attention to the protests of those who are not actually buying the tickets. Perceptions of fairness can shift quickly in consumer markets. However, new brands, services and routes have an advantage over incumbents who have been using a particular model for years. People who have never tried a newly launched airline will have no strong price expectations. While those who have used the same one for years may feel ripped off by a price increase.

The likely outcome of this dynamic is that existing airlines are under more pressure to keep prices low, and will sell out all their tickets quickly. New airlines can charge more, will mop up the excess demand and, as a result of the higher prices, may be perceived as a higher quality service. This will give them a competitive advantage when demand returns to its usual lower level from February onwards.

I’m not sure there is any lasting reputational effect at stake.  Research suggests that pioneering brands (first product in a consumer category) and long-dominant brands obtain a psychological position as a prototypical example of a product in the category.  Prices of prototypes can strongly affect price expectations for other products in the category, but prices of non-prototypes don’t strongly affect price expectations for prototypes.  But this affect is strongest in especially innovative product categories, and weaker otherwise.  I’d suspect that airlines fall into the “weaker otherwise” set.

With airline travel, consumers see many options for a relatively undifferentiated service and compare prices.  While airlines offer full-service brands and discount brands, and may further differentiate between first class and other seating, within each category consumers compare prices across companies.  In such an environment, the specific price expectations that attach to an airline brand itself (as opposed to the product category the brand participates in) are probably quite weakly held.  As the Financial Times article notes, 70 percent of air travel in India is on “low fare” carriers (including the low-fare affiliates of full service airlines).  It is a fluid, contestable market which is unlikely to support the strong, durable price reputations necessary for Caldwell’s effect to work.

NOTE: The Wikipedia “List of airlines in India” reports current market shares and links to additional information.