An Economist Deals With a Cancelled Flight
Today, I flew from Monterey to LAX on United, then on to Washington Dulles, with a connection planned to Dayton, Ohio. My plan was to rent a car in Dayton and drive to my hotel in Richmond, Indiana, and then go to a late dinner with some of the faculty at Indiana University East. I speak tomorrow afternoon at Indiana University East.
One problem: when I got to Dulles, I found out that my flight to Dayton had been cancelled. There wasn’t another flight to Dayton until the morning and this involved a connection in Newark.
I asked the customer service rep if she could get me on another airline. My little upset: I’m pretty sure that if I hadn’t asked her, she wouldn’t have mentioned it. But she worked the problem and came up with an alternate: take a Super Shuttle to Washington Reagan airport (DCA) and take American Airlines late this evening to Dayton. Done. So I’m sitting here in Washington Reagan waiting until I get hungry for a Five Guys hamburger.
There are two economic components to this experience.
1. Sunk costs.
I could have got all pissy and woe-is-me about the cancelled flight, but what’s the point? Then I would have paid for it twice: by missing a meal I had been looking forward to with some faculty and by having a fit. The loss due to the cancelled flight is a sunk cost.
When I have taught sunk cost in the past, I would sometimes remind my students of the expression “Don’t Cry Over Spilt Milk.” Then I would say that that wasn’t quite the right expression. Maybe you need to cry, but recognize that it’s spilt and that you can’t get it back.
Now I think it’s an apt expression. The crying over the missed flight would, as noted above, have added to the cost.
2. Compensating Differentials
Because the flight was cancelled due to a mechanical problem, United was responsible for making amends. The customer service rep gave me a $29 voucher to cover the Super Shuttle to Reagan, a $10 voucher for a meal either at Dulles or Reagan, and a ticket on American to Dayton.
It occurred to me that some people might scoff at the $10 voucher. But not me. I’m an economist. I recognize that $10 doesn’t cover a really nice meal. But think through what would happen if United’s policy changed to where they give you a $20 voucher. That extra money has to come from somewhere. Where does it come from?
Here’s where compensating differentials enter. The new equilibrium would be for United to charge a very slight amount more for tickets. I would rather pay slightly less each for a whole bunch of tickets and face the small probability that sometimes it means that instead of having a nice dinner with a glass of wine, get a Five Guys burger. (Truth be told, I’m actually looking forward to a Five Guys burger.)