The Warped Economics of Carry-On Luggage

I just got home from a quick trip to Denver, where I spoke at a Concord Coalition event on our nation’s dire fiscal outlook. That’s a big, complex problem, but today I’d like to share some thoughts on an even more vexing problem: the warped economics of carry-on luggage.

As you probably know, most major airlines now charge fees if passengers want to check luggage. Many travelers object to these fees in principle (as you can easily confirm by surfing around the blogosphere), but what’s most interesting to me is how people respond to them.

Based on my travels, I see three related issues.

1. If you charge fees to check bags, passengers will bring more and larger carry ons. Like everyone else, airline passengers respond to incentives. So if you make it more expensive to check bags, they will bring more carry-ons. The overheads thus fill up more quickly and are often at capacity before everyone has boarded. More travelers thus get to experience the ignominy of losing the carry-on equivalent of musical chairs (and flight attendants have to waste time removing bags and checking them). (This observation is hardly new; my student Kerry mentioned it to me last week, for example, and others have written about it.)

2. This effect may get magnified when airlines offer to check bags for free at the gate. As I was waiting to board my flight to Denver, the gate agent announced repeatedly that customers could check bags for free if the overheads ended up being full. I presume that the airlines do this in order to avoid adding insult to injury for the passengers who lose at musical bags. (Imagine the flight attendant telling you: “Sorry, the overheads are full; please give me your bag and $35.” ). This does have the side effect, however, of encouraging even more customers to bring their bags onto the plane to see if they will fit. The worst case (financially) is that they end up avoiding the fees for checked luggage.

The increased competition for overhead space is worsened by the lack of property rights. Just as competing boats can over-exploit a fishery, so do airline passengers overexploit overhead space. In econ-speak:

3. There is a tragedy of the commons as passengers compete for overhead space. Without enforceable property rights, travelers engage in all sorts of inefficient behavior to gain overhead space (e.g., fighting to be among the first in their seating group to get aboard). Perhaps the most galling is when passengers seated in row 35 bring on two over-sized roller bags and stow them in the overheads around row 15. They then saunter, unencumbered and without shame, to their seats in the back of the plane, while the unsuspecting souls in row 15 (who usually board later) face a major nuisance: what to do with their bags. Let me tell you, it’s not a pretty sight when the folks in row 15 have to stow their luggage in the overhead space back in row 35 — if there’s any left at all.

The fees worsen this tragedy of the commons, of course, since even more bags are competing for the limited resource of overhead space.

So what’s the solution? Well, one option would be to create property rights in the form of assigned overhead space. One roller-bag sized space could come bundled with each seat, for example, or perhaps the airline could sell spaces separately. Maybe there could even be a secondary market in which passengers buy and sell spaces among themselves. Row 35 person: If you really want this space over my seat in row 15, how much are you willing to pay?

OK, that vision is a bit fanciful, and there are a host of challenges (e.g., different size bags and the transaction costs of running a real-time overhead bag space market) that may make it impractical. But it is fun to dream.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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