Carpe Diem

Robert Reich objects when airlines use market-based pricing, but enjoys market pricing for his $40,000 speaking fee

Robert Reich was relieved that he was a passenger on one of the last flights to leave NYC before the airports closed on Monday.  But he’s upset that the airline had “jacked up” ticket prices to $4,000 for the last flights leaving NYC for California.  Even at $4,000 per ticket, the flight was oversold by 47 passengers, and the airline then paid 47 volunteers $400 each to take a later flight, “whenever that might be.” In his own words, Professor Reich explains:

Assuming that the 47 extra passengers had each paid $4,000 to get onto the plane at the last minute, and the 47 who gave up their seats for them received $400 in return, the trade would have been “rational” in narrow market terms. After all, the seats were “worth” $4,000 to those who bought them at the last minute, and switching to the next flight (whenever that might be) was “worth” $400 to those who agreed to do so.

But the transaction was also deeply exploitative. The airline netted a huge profit because of the impending storm.

I couldn’t help think this was a miniature version of the America we’ll have if Mitt Romney is elected president. Rational and efficient in terms of supply and demand, guaranteed to maximize profits, but fundamentally unfair.

MP: Here’s what I find exploitative and fundamentally unfair: The Las Vegas Review-Journal reported in 2002 that “Reich is in the Washington Speaker Bureau’s top-fee category, among 28 speakers who garner one-time speaking fees of $40,000 or more,” and he therefore is able to net huge personal profits for his 30-minute talks (or less than 15 minutes for the talk in Las Vegas at the UNLV Foundation, according to the Las Vegas paper).

OK, actually, I think it’s great that Professor Reich uses market-based pricing for his speeches, and I applaud him that he can charge $40,000 speaking fees (according to the Las Vegas Review-Journal) based on market demand for his time, but then he really shouldn’t complain when an airline uses market-based pricing to allocate scarce seats on a plane when demand is high during a natural disaster.

And if Reich thinks that the market for giving speeches is an example of a market that is “guaranteed to maximize his profits” as a supplier of speeches, but is “fundamentally unfair,” because his prices and profits are so high, then I would challenge him to reduce his speaking fees significantly to a much lower, and much more “fair price.”

HT: Dean Harrington

Update: In an email, Robert Reich writes that he has no connection to the website in my original post that reported his speaking fees range between $37,500 and $100,000, and he requests that I report that I cannot verify that website’s information about his speaking fees. In the revised post above, I have removed the references to that website, but have added a link to an article in the Las Vegas Review-Journal that reported in 2002 that Robert Reich’s speaking fee was “$40,000 or more.”  However, because that was ten years ago, I cannot confirm that the $40,000 speaking fee is accurate today; obviously it could be more, or it could be less.

43 thoughts on “Robert Reich objects when airlines use market-based pricing, but enjoys market pricing for his $40,000 speaking fee

  1. There’s nothing surprising about Robert Reich’s lack of comprehension of the very basic law of supply and demand. I’ve stopped being gobsmacked at his stupidity.

    What I find stunning is that anyone pays him anything at all to speak!

  2. But in actuality most of the seats on that flight were probably sold at weeks previously for under $500.00. I’d imagine his seat was first class and bought at the last minute. Those seats are always high priced.
    After paying 47 people $400 each, $18,800 total, they may have lost money on the flight.

  3. I’ll take a $4,000 flight to anywhere (and back) than have to sit through a Reichian rehash of a system that has miserably failed.

  4. and yet, I’m sure that Mr. Reich didn’t give up his seat. If he is so concerned about fairness, shouldn’t he have used some of his excessive wealth to pay for the less fortunate who couldn’t afford teh $4,000 seat?

    • Does Robert Reich oversell tickets to his speech and then buy the oversold tickets back at the door for 1/10 the price he sells the tickets to people who want to hear him speak?

      • Airlines oversell flights because it is unusual for everyone to show up for a flight. If Robert Reich wanted to do that with his speeches, he’s free to do so. None of that has anything to do with what Andy is saying.

      • BTW, you do understand that to make your Reich analogy accurate, he would not only have to pay to bump people who want to waste time listening to his drivel from the oversold event, but he would also have to provide a seat for them at a future event.

  5. This is classic free-market failure not market-based pricing because of asymmetrical information. Do you think the 47 passengers who gave up their seats knew the airline was selling them for $4000? Would you volunteer to sell your seat for $400 if you knew its current value was $4000?

      • Methinks:

        As usual you attacked me instead of attempting to answer my question. I’ll ask again, did the passengers who voluntarily sell their tickets for $400 know their tickets were being sold for $4000? If no, look up “asymmetric information market failure.” The airlines certainly knew of the $4000 price. If the volunteers knew, why not hold out for more money or other consideration? If you want to declare a free market, you have to play by the market failure rules that define it.

        At what point is something already sold with money already changing hands not still available to the highest bidder: when the airplane gets ready to take off?

        • That’s because explaining anything to you is usually pretty fruitless.

          Sigh. Oh well, let’s try:

          It doesn’t matter. You don’t seem to understand that airlines aren’t obligated to provide any compensation at all to passengers who are refused boarding for certain reasons, including a natural disaster. The compensation offered to people for voluntarily giving up a seat is merely the cost of keeping customers happy and smoothing the process of bumping passengers. The customers who really need to get where they’re going today have a higher probability of getting there and the customers who are more flexible or for whom the money or other consideration is worth more can opt for that.

          If nobody volunteers, then the airlines have a protocol by which they force people to give up their seats. The compensation is merely an act of goodwill on the part of the airline. So, there’s nothing for passengers to “hold out” for.

          Not that it’s in any way relevant here, but there is no information asymmetry. Anyone who cared to know what a ticket on their flight was going for could have found out by using a ubiquitous smart phone to access that information on the internet. It’s so easy even Robert Reich could work out how to get at it.

          • Methinks,

            OK, I accept that explanation with questions—I don’t fly often.

            Is the airline protocol in an emergency really determined on willingness to pay instead of need to fly? Deep pockets trumps granny flying to her son’s funeral?

            Exactly what am I buying when I pay money for an airline ticket? I’ll grant you that voluntary bumps with compensation are almost free market (as long as the airline allows me to sell my ticket they were going to sell for $4000 to the same customer for say $3000). Anyone who supports selling sports tickets for above face value should support this.

            Nobody should be involuntarily bumped from a flight they have already paid for because someone offers more money after the initial sale. The bidding process has to stop sometime, and I personally think it should be when the money changes hands. If I already have a sheet of plywood in my truck that I paid Home Depot $20 for they should not be able to forcibly take it back from me in their parking lot and sell it for $100 to the next guy that comes along.

            Why do we allow airlines to legally sell something they can’t deliver?

          • First of all, only about 0.001% of all passengers are bumped in any given year. Second, not all passengers view it negatively. Almost 20 years ago I worked for a guy who almost always volunteered to be bumped when the opportunity presented itself on our many business trips because he could get compensated for taking the next flight and just finished his work on his laptop while he waited. Win-win.

            I found out I’m wrong about the compensation for involuntary bumping – it’s now mandatory, but the caps are low and airlines were compensating people long before the FAA, in an effort to convince the feeble-minded it’s working on behalf of passengers, made the compensation already extended by airlines mandatory.

            Although I fly reasonably often, I don’t work for an airline, so my understanding of bumping is not that deep. John Dewey would be a better source for such details. From what I understand, at most airlines people who check into their flight later have a higher probability of being involuntarily bumped, if it comes to that. It doesn’t have anything to do with grannies and deep pockets. The airline will always ask for volunteers (something they were doing long before the FAA made that mandatory in another show of political expediency). If not enough volunteers materialize, the involuntary bumping begins according to a set protocol and not the depth of airline passengers’ pockets.

            Unfortunately, in part because of the Patriot Act, passengers can’t sell their tickets to each other. In principle, though, I agree with you; passengers should be able to resell tickets. And I do believe that you can compensate a fellow passenger in exchange for him voluntarily giving up his seat to you if you’re involuntarily bumped. Again, not certain, but I believe I’ve seen that done.

            Exactly what am I buying when I pay money for an airline ticket?

            You’re paying for the airline for a flight. HOWEVER, you are not guaranteed arrival or departure times. Depending on the circumstances, the airline may or may not have to compensate you for arrival and departure times hours and days different from what’s on your ticket.

            We allow airlines to overbook because there’s usually a substantial number of no-shows and people are rarely bumped even on oversold flights as a result. If you’re a passenger, the willingness to overbook is good for you. Imagine if you really needed to get somewhere and the airline refused to overbook, but there were 15 people who bought tickets and didn’t show. The flight would leave with 15 empty seats – one of which could have been occupied by you but isn’t. Since there is usually a significant number of no-shows on most flights and only 0.001% of passengers are ever bumped, it’s better for passengers and the airline to overbook as a matter of policy.

      • Methinks,

        I’m all for getting everyone on the plane who wants to fly and fill up all the seats. Thank you for your explanation. I only fly a couple of times a year, and I never have what I consider a problem. I fly to Florida now for less than I did in the 1970s, and that’s not in inflation adjusted dollars. Deregulation is great.

        If the passengers who are voluntarily bumped are happy, I guess there is not a problem. I would not hold that up as a perfect free market model since they can realistically only sell their ticket to one person (the airline) who sets the price and the airline can sell it to multiple high bidders. I would think the involuntarily bumped passengers should themselves be able to accept or reject the high bid for their seat. There is no additional terrorist threat of me selling my ticket to the same passenger that the airline would sell it to.

        A 0.001% (1 out of 1000) bump rate is pretty high considering thousands of people fly every day. The Six Sigma benchmark in manufacturing is 0.00034% or 3.4 defects per million. Of course airplane seats and manufacturing processes are not the same thing.

        • Walt, I don’t think anyone is holding up airlines as an example of a free market model. What airlines can and can’t do is strictly regulated by the FAA and the Patriot Act as well as a veritable alphabet soup of government bureaucracies Jet Beagle (aka John Dewey) knows much more about than I do.

          I don’t have a problem with passengers who have confirmed seats selling to other passengers who have been bumped. I am not well informed on this, but I’m pretty sure the airlines don’t care if passengers negotiate with each other and I’m reasonably sure I’ve actually witnessed that happening in the past. Who knows, maybe some of the volunteers on Reich’s flight got a little extra from an i-banker desperate to get the hell outta Dodge.

          I accidentally stuck an extra “0″ in there. It’s not 0.001% of passengers who get bumped involuntarily, the stat I read is 1/10,000 or 0.01% of all passengers. Milwaukee Biztalk reports the rate for 2011 at 0.78 per 10,000. That’s 1/100 of 1%. Your odds of an involuntary bump are pretty close to zero. Considering the high no show rate and a large supply of people willing to volunteer for bumping, as a passenger who really needs to get to your destination, you’re much better off if the airlines overbook their flights.

          • Methinks, Mark called the airline system “market-based pricing” in the original post. I really don’t see how a hidden variable pricing model (airlines) that can change after money has changed hands and a transparent fixed-price written contract (Reich) are linked. It seems to seek out an emotive response from the average person because of the huge speaking fees involved.

            Yep, 1.05 per 10,000 involuntary bumps in the last year, but only 0.77 the year before. That’s a rather huge 27% increase in one year.

            See page 35
            Source

          • Walt, you’re going in circles again and cooking nonsense stew. Nobody who purchased a ticket 4 weeks in advance is going to by forced to pay the difference between the price they paid weeks ago and the going rate for tickets on sale today.

            “Yep, 1.05 per 10,000 involuntary bumps in the last year, but only 0.77 the year before. That’s a rather huge 27% increase in one year.”

            Are you insane? Are your math and logic skills so incredibly poor that you can’t understand that large swings in miniscule numbers are meaningless? The change between 2010 and 2011 isn’t even a rounding error. It amounts to 1/100 of a person per 10,000 flyers. Jesus tap dancing Christ, the lengths people will go to in order to keep whining.

          • I reply here because the actual comment reached a depth or something.

            >Yep, 1.05 per 10,000 involuntary bumps in the last year, but only 0.77 the year before. That’s a rather huge 27% increase in one year.”

            >Are you insane? Are your math and logic skills so incredibly poor that you can’t understand that large swings in miniscule numbers are meaningless? The change between 2010 and 2011 isn’t even a rounding error. It amounts to 1/100 of a person per 10,000 flyers. Jesus tap dancing Christ, the lengths people will go to in order to keep whining.

            first of all it is not 1/100 of a person per 10,000 but 27/100 of a person per 10,000, still a very small fraction, but a bit bigger then you say.
            secondly, we are talking about 60,000 passengers here, and it is not a difference between two big numbers, it’s a sum of independently bumped from many flights. it’s not such a small number that increase or decrease by 1/4th is meaningless.

          • Efim

            Of course you’re correct. The stat I pulled was .78/10,000 and I didn’t pay close enough attention to his post to realize he’d changed it so that the difference wasn’t .78 vs. .77 but 1.05 vs. .78. Mia culpa.

            Even the larger difference is actually pretty meaningless for our purposes. They’re not large enough to encourage people to choose alternative transportation and the airlines obviously have every incentive to keep it low enough to reduce the attractiveness of alternative forms of transportation. However, airlines have no control over weather and bumps on oversold flights during times of emergencies like hurricanes are more likely. An increase in involuntary bumps – even a relatively significant one – may still tell us nothing at all about how efficiently the airline is managing over-bookings. You need more detail than the raw numbers.

            The bottom line is that the number of involuntary bumps is small, “shit happens”, and we’re getting bogged down in minutia in this discussion.

      • Methinks,

        Small number, big number, it does not matter in quality control, and I would surely consider bumped passengers an airline quality issue. I can guarantee you someone at each airline is in charge of continuous improvement (CI) in this area, and they would not be happy with a 27% increase in bumped passengers in one year. GM spent billions of dollars trying to beat Toyota’s quality measurements on much smaller numbers than the airlines’ bumped passenger percentages.

        For CI you need to know the benchmark, the gap between you and the benchmark, your trend direction, and the rate of gap closure or gap widening over time. You then develop a gap closure plan with achievable targets and a budget to support that plan. You can’t realistically set a goal of 100% unless tons of money and years of time to achieve the goal are supplied by those who supply the resources (and maybe setting the goalposts a bit wider such as accepting 100% of students receiving a “C” instead of 75% receiving a “B”).

        Happy Halloween. I’m on my way to Detroit.

        • Good Lord. Do you really not understand the difference between a factory and an airline?

          Since the probability of involuntary bumping rises when gaia decides to send us bad weather and that’s out of the airlines’ control, I’m guessing the margin for error is a touch larger for airlines than it is for your car factory.

          and that stat is for the entire industry. I doubt very much that that such an imperceptible fluctuation is going to make the difference between people flying and taking the train to from NYC to LA.

          • Methinks,

            Apparently, passengers involuntarily bumped per 10,000 passengers is an industry standard and important enough to be published and compared. I did not make up the statistic or the data. The difference from the top airline to the bottom airline is a big number to someone while probably quite small in percentage, and it makes little difference to others.

            The statistic of a few hundredths of a percent could be the difference between the best or worst of your peer group, and the difference between a quality director keeping her job or losing it. Do you want to chart a negative 27% peer benchmark trend over time and ask for a raise or contract renewal? I bet the answer even for the airline industry is no.

            I spent too many years on Harbour Report data to blow away the small numbers as nothing. And, yes, your viewpoint is determined by how the data does or does not affect you personally. I think the discussion has veered off track enough for tonight. Thanks.

          • Your penchant for pawing through irrelevant minutia is breath taking. Do you understand the main points or not?

    • Walt: Considering the people who bought the tickets are the ones who sold their seats back to the airlines, I’d say they are very aware of what the airline was charging for a seat.

      But for the sake of argument, let’s say they had no clue. Let’s say they paid $229 (the price of Southwest from Boston to LAX). The airline says “We overbooked. We’ll give you $400, plus a ticket on the next flight out.”

      So, the passenger makes $171 on the transaction, plus gets a ticket out on the next flight. So, who exactly is losing here?

      Maybe the passengers could have gotten a better deal, but considering the airline needed 47 people to give up their seat and 47 people did, I’d say the price was perfect.

      • Jon,

        Can I offer my $229 ticket to the other customer at the gate for $3000 or is the airline the only one who can sell my seat on the secondary market? The airline could say “we overbooked, but a customer is willing to buy your ticket from you and we will charge you a negotiated fee to do so.” I agree a ticket holder should be voluntarily able to sell his ticket for whatever he wants to sell it for in the open market. The non-volunteers should receive what they paid for.

        • Walt, the FAA regulates what the airline can and can’t do. There’s nothing stopping me from offering you $3000 to volunteer to give up your seat. However, the airline has already enticed enough volunteers at $400, why would I do that?

          I would only do it if I was involuntarily bumped. Then, you and I would go to the gate agent where you will tell her that you volunteer to be bumped. However, I’m not sure if there’s a protocol for calling back the involuntarily bumped. I know that if you’re a stand-by passenger, you CANNOT offer to pay a passenger with a confirmed seat for his seat.

  6. Robert Reich would be the same moron who said that the problem with America’s healthcare system is that we have too much technology.

  7. Can we expect a similar complaint on behalf of airlines from Reich when they are forced to severely cut their prices to attract travelers? Or does does “exploitation”, like sexism and racism, flow in only one direction for this nitwit?

  8. For the social point of view it reflects an inefficiency for the price paid for the last seat given up to be less than the price paid to take that seat. The airline is a monopsonist buying seats from those who already have seats and a monopolist to those for whom this is the last flight whom who don’t a seat. Hence the inefficiency. (Those selling their seats may be well aware the seats are being resold for more — Reich was told afterall. They sold anyway, because they had no option.)

    Just because there was a voluntary exchange doesn’t make it market based. There is no market. If the exchange of seats were market-based more mutually beneficial exchanges would have occurred.

    Reich may be a unique commodity and withhold his services to jack up the price. Or he may be in a competitive market for a major speakers in which case he simply takes as many gigs as he desires to take.

    • Airlines do not have a monopoly on transportation. Instead of flying people could take a train, a bus or drive a car. If they were really desperate for an air machine, they could have chartered a private jet. The East Coast had plenty of warning and people were free to make arrangements to leave.

      Just because there was a voluntary exchange doesn’t make it market based.

      You define a market and then claim it’s not a market. Mmmmmkay.

    • I don’t see a connection between oversold airplane seats at different prices and a contract signed months in advance that has a clearly set price for a speech.

      • Really? What if 10 groups want Reich to speak at their event on the same day, 3 months hence? Is it first come, first served? Or would Mr Reich decide to up his price?

        • James,

          I assume Reich would honor his prior signed contracts with clearly-set fees, and maybe raise his price next time again with clearly-set fees. I can’t see him yanking tickets out of the audience’s hands at the door and reselling them to someone else who walks up and offers a higher price. The yield management system the airlines use and the speaking-fee system of Reich are not comparable regardless of the claim made in the original post.

  9. regarding the update:

    It’s very nice of you to comply with Reich’s request, but it’s quite funny that he missed the point and your point remains unchanged regardless of what people are paying to hear his drivel. Reich still peddles his speeches to the highest bidder just as surely as anyone else.

  10. Robert Reich and Bill Clinton charge as much as $100,000 per speech and they actually believe they have all the answers to save mankind. If they do, in fact have all the answers, should not they be giving their speeches for no cost? Surely if they worked for free, they would be asked to give several speeches a day around the world. Mankind is depending on them. I think they should be willing to sacrifice and give free speeches just to save mankind.

  11. Your lovin’ sends me but your logic fails: The airline’s price gouging is not at all related to Reich’s speaking fees. Why try to connect them? Robert Reich is a pretty smart fella.

    • They are both charging what the market will bear. That’s the connection.

      Although, the concept of their being a “market” for the likes of Reich to get paid for speeches is a lot shakier than people bidding on an actual economic good. It’s more like a discretionary call by some rich elitists who get to decide whose ideas “matter”. Probably the same people who pay Reich for his leftist drools would recoil is horror at the prospect of even letting Ron Paul speak at all much less pay for it. (Paul warned of the excesses of the Federal Reserve and deficit spending in the 1970s while Reich went along with the gag while Shill Clinton sold us out to China and the globalist traitors.)

    • They are both charging what the market will bear. That’s the connection.

      Although, the concept of there being a “market” for the likes of Reich to get paid for speeches is a lot shakier than people bidding on an actual economic good. It’s more like a discretionary call by some rich elitists who get to decide whose ideas “matter”. Probably the same people who pay Reich for his leftist drools would recoil is horror at the prospect of even letting Ron Paul speak at all much less pay for it. (Paul warned of the excesses of the Federal Reserve and deficit spending in the 1970s while Reich went along with the gag while Shill Clinton sold us out to China and the globalist traitors.)

  12. If there is a market failure here, it is the organizations that believe the Robert Reich is worth 40 to 100K – what on earth could Reich say that is worth 40K? Or for that matter, ANY speaker?

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