SYLVIE DOUGLIS, BYLINE: NPR.
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WAILIN WONG, HOST:
DARIAN WOODS, HOST:
WONG: I am really excited because we have been wanting to do today's INDICATOR episode for a long time.
WOODS: We have.
WONG: It's not just for our awesome listeners but from our listeners.
WOODS: That's right, made for, from, by, sort of...
WOODS: But, you know, really good questions from our listeners about all kinds of economics and financial questions they have in their lives.
WONG: So today on THE INDICATOR FROM PLANET MONEY, it is a listener question show. We're taking on airline prices, buying in bulk at the grocery store and the Federal Reserve.
WOODS: All coming up after the break.
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WOODS: All right. Wailin, why don't you start? What's your listener question?
WONG: It's all about airline ticket pricing.
JIMMY VIVAR: Hi. My name is Jimmy Vivar (ph), and I'm from Los Angeles. And what I'm wondering about is, how do airlines price their tickets? They seem to always change. And every time you check, it seems to be different.
WOODS: As somebody buying a lot of plane tickets to go home, I would like to know that, too. So, Wailin, what did you find?
WONG: So in the airline industry, the whole name of the game is selling every seat on every flight for the most money possible. And companies have developed all kinds of levers they can pull. Here's a pretty obvious one - selling more expensive fares for a flight as the departure date gets closer and seats are filling up. And, you know, when you get on your flight, it could be that you and the person next to you paid wildly different prices for your seats even though you're taking the same flight.
WOODS: I've heard that, like, prices can even change in a matter of minutes these days.
WONG: And, you know, this is not entirely in our heads. So...
WONG: ...The traditional airfare pricing system is static. The companies decide in advance, here's how many seats we're going to offer at these different prices. And those fares get published in a centralized database. And then to change the fares, airlines submit new information to the database. And this is a process called fare filing.
But, of course, technology, it's always changing. And the industry now has the ability to adjust prices kind of close to real time without having to file new fares through the system. So, like, instead of setting one price for business class and another price for economy, now an airline's algorithms can calculate the best price to charge a customer at that time based on variables like which days they're traveling or the current demand for that route.
WOODS: Right. And, like, how detailed does this go?
WONG: Well, you know, airlines want even more detail on this, right? Like, they want to really optimize, like, the amount of revenue they're getting per person. And so...
WONG: ...The next step of what they're planning is personalized offers for passengers. So then instead of giving everyone the same menu of add-ons, you know, the software could see that, for example, someone's arrival and departure dates are spaced a week apart. That person is probably taking a longer trip, maybe packing a bigger suitcase. So that person might be shown, like, a special offer for extra baggage allowance.
WOODS: And that's kind of actually paranoid on the internet. Like, in the past, I've used VPNs. I've gone in incognito mode. I've, like, tried to delete cookies and kind of really see if I am getting the best deal.
WONG: Yeah. And I've seen this tip, too. Like, search in incognito mode because the airlines will show you a higher price if your cookies show that you've searched for a particular flight a lot of times. The industry says this is a myth. They say airlines are not using personal information like that to calculate fares. But speaking of pricing opacity, you looked into prices for a different industry - right? - for your question?
WOODS: That's right. So my question comes from the supermarket aisle.
WONG: Not as cramped as the airline aisle.
WOODS: Bit more elbow room.
RUDY MOSER: Hello. This is Rudy Moser (ph) from Omaha, Neb. Is there a reason why some items produce economies of scale and some don't?
WOODS: Like, so when you buy larger packages, typically you'll get savings. I mean, this is common wisdom, right? It's the whole idea behind Costco. But Rudy went on to tell us that he's noticed those savings don't always appear. And specifically for him, he finds that Oreos are cheaper when you buy, like, a family-sized package, but his eggs aren't cheaper in bigger trays.
WONG: So I think this is, like, a really good question, and I'm very curious to hear the answer.
WOODS: Yeah. So I talked to an agricultural economist, Dawn Thilmany, and she says that the discounts that you get for bigger purchases, they're not largely because of packaging costs. It's mostly just pricing strategies.
WONG: Are you telling me this industry is also trying to maximize revenue from their customers, just like the airlines (laughter)?
WOODS: Yeah. No, it turns out the food industry is the airlines of the ground.
WONG: I'm going to be thinking about that metaphor for a while, Darian (laughter).
WOODS: You know, food manufacturers also love to charge different customers different prices if they can. I mean, why not? Why not charge people who are willing to pay through the nose? This is what economists call price discrimination. It's when companies charge more or less to different customers.
So take Oreos - if you are a cookie lover with, like, a big family, you're going to get the family pack or the party pack. You know what a cookie should cost. You're a super-consumer of Oreos. And also, you can wait a couple of weeks for a good deal because you got some in storage. So you do end up getting a good deal per Oreo when you buy your family pack. But on the other hand, if you're a different type of customer - you're, like, a cookie dabbler, you know; you might have an impulse buy - that's probably going to be a smaller packet. And you'll be paying more per cookie.
WONG: OK. So that explains why buying in bulk works for Oreos. And by the way, I will buy a family pack just for myself. I love Oreos.
WONG: But why don't Rudy's eggs engage in the same price discrimination game?
WOODS: Well, sometimes they might, but it does not seem to be as common as for things like branded cookies. And there are couple of reasons for this. Like, to do price discrimination, you need a bit of market power, like brand loyalty. And I don't know about you, but I can't really name the brands of the eggs that I buy. I mean, can you?
WONG: No, no. I will buy kind of, like, whatever looks like somewhat humane and is on sale.
WOODS: Yeah, yeah, yeah. So there's not as much brand loyalty. And also, eggs are more perishable - you know, probably don't have an entire basement of eggs in storage like you might with cookies. So this whole idea of a price-sensitive shopper who might buy a lot of eggs doesn't work as much.
WONG: All right. So no trying to break the Guinness World record for the world's largest quiche.
WOODS: Use your eggs judiciously.
WOODS: And for our last listener question, we are going to bring on a very special guest, producer Nicky Ouellet. Welcome to the microphone.
NICKY OUELLET, BYLINE: Hi. Happy to be here.
WONG: And, Nicky, you took on our final question. It's about the Federal Reserve system, which is made up of 12 Federal Reserve districts that cover the U.S.
DAVE: Hi. I'm Dave (ph) from Chicago. It seems like the San Francisco Federal Reserve district covers more territory and experiences higher growth than, say, Cleveland or Philadelphia. Is there any thought at the Fed about shifting districts?
OUELLET: So if you look at a map of the districts, they're not very evenly drawn. Like, San Francisco somehow covers, like, almost all of Western America.
WOODS: Greedy, San Francisco.
OUELLET: Greedy, San Francisco.
OUELLET: And Missouri actually is the seat of two different districts. And the reason actually dates back to when the Federal Reserve was established in 1913. Back then, the goal was to create a system of banks for banks to clear paper checks and provide coins - you know, bank stuff. And the map of Fed districts they came up with basically matched up with the relationships banks already had, which had formed around railroad hubs because trains were the fastest way to move money around at the time.
WONG: OK. So that's how it used to be. But things have really changed a lot - right? - population shifts, there's new financial hubs.
OUELLET: Well, the interesting thing is that there hasn't been that much shuffling even with those big changes. I called another David - David Wheelock - at the Federal Reserve Bank in St. Louis, and he says that's largely because each district has full-service branch offices with researchers collecting information and anecdotes about the economy in their area. So a business in a more far-flung part of the district can still have the ear of the Fed. And this information is coming in from all over the country to help guide monetary policy. So David says even if the map looks lopsided, there isn't a regional bias.
WOODS: I don't know. If I was living in Idaho, I would be lobbying for a local Fed myself. Even if it makes no difference...
WOODS: ...Wouldn't it be nice just to have a Fed in your backyard?
OUELLET: Yeah, the potato Fed.
WONG: Well, thanks to David, Rudy and Jimmy for all of your great questions. If you've got a burning economics question you'd like us to answer, please email us - we're email@example.com - and include your name and number. Again, that's firstname.lastname@example.org.
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WOODS: This show was produced by senior producer Viet Le with engineering by Maggie Luthar. It was fact-checked by Sierra Juarez. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
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