We Don't Kid Around Here!
What If the Rest of the World Were Like the Wireless Industry?
To be happy in this world, first you need a cellphone and then you need an airplane. Then you're truly wireless.
- Ted Turner
Source: The Wall Street Journal Wednesday 19 May 2004 advertising the Sprint PCS Fair & Flexible Plan
Confusion Pricing: Why Cell-Phone Plans Are So Hard to Understand
by Tim Harford
For nearly two months, a glossy magazine from my cell-phone company has been lying around the house. I took it with the express intention of choosing a decent calling plan, but so far, little progress. Occasionally, I pick it up and thumb it listlessly. I admire the colourful pictures but cannot get my mind around the different pricing options. The permutations include on-peak, off-peak, in-network, out-of-network, joint accounts, "bundles" of this and that, and a variety of additional offers conditional on my signing some form of longer-term contract. The choice is bewildering. Usually, I have little sympathy for those who complain about the agony of having to choose. If the choice is important, such as when buying a house, then it's good to have the choice even between fine details. If the choice is not important, such as that between the 55,000 drinks alleged to be available at Starbucks, then few of us acquire gray hairs making it.
But the range of cell-phone tariffs isn't that kind of choice. All we're being offered is a number of different prices. Unlike the choice between the venti caramel latte and the small black coffee, the choice between "Any network anytime 200" and "Any network off-peak 1,000" is not a matter of taste. There's a correct answer and dozens of incorrect ones, and a computer armed with your phone bill and your company's pricing plans could work out, with hindsight, what you should have done. With neither the computer nor the hindsight, you can end up paying far more than you should. You will also struggle to discern who is offering the best deals. So it's tempting to conclude that the confusion is deliberate.
Economists haven't had much to say about confusion pricing until recently. We find it hard to talk about the subject because the Vulcans who live inside our economic models don't get confused. However, Eugenio Miravete, an economist at the University of Pennsylvania, has been studying how humans, not Vulcans, behave when choosing between confusing calling plans. His somewhat surprising conclusion is that customers don't leave much on the table. They are good at judging which calling plan will cost least, and good at switching if their initial guess is wrong.
I wasn't sure what to make of Miravete's research. It is limited by the availability of detailed data, so Miravete only studied the early days of confusion pricing, when the choice was between just two calling plans. My company offers 10, plus innumerable combinations of frills and top-ups. I face much more demanding calculations than the ones Miravete studied - hence my well-thumbed magazine and no decision. But something strange happened after I read about Professor Miravete's intelligent, motivated subjects. I felt ashamed and was galvanized into calling my phone company. I spoke to a lady called Katie, who was very quickly able to tell me how much I was paying, and for what, before suggesting a couple of different plans that look likely to save me 10 or 15 pounds a month. Not bad for a 5-minute phone call.
The whole experience suggests that confusion pricing is not really about trying to entangle every customer in an impenetrable web of complex offers. Instead, it's a very simple screening device to spot customers with money to burn. If you don't care enough about your phone bill to ask Katie for a spot of advice, then you can obviously afford to pay a little more. I did wonder whether my life might be made even easier, though. Couldn't the phone company just use its computer to offer me the best deal, with hindsight, each month? "I'm afraid we can't do that," said Katie, rather sweetly. "I don't know why. That is the way things have been organised for some time."
Source: slate.com Slate 15 April 2006
Bargaining Down That CT Scan Is Suddenly Possible
Patrick Fontana twisted his left knee last spring while hitting a drive down the fairway on a golf course in Columbus, Ohio. But what really pained him was the $900 bill for diagnostic imaging ordered by his doctor. Mr Fontana, a 42-year-old salesman, has a high-deductible health plan coupled to a health savings account. Since he was nowhere near meeting his deductible, he was on the hook for the entire bill. So he did something that insurance companies routinely do: he forwarded the bill to a claims adjuster, in this case My Medical Control, a Web-based company that reviews doctor and hospital bills for consumers. After concluding that Mr Fontana was not getting the best possible price, the company’s representatives called the imaging facility and demanded a lower one, promptly saving him $200 — minus a 35% collection fee. “I asked before I went in to the clinic how much it would cost, and they just will not tell you,” he said later. “I didn’t know until I got the bill, and at that point I figured I had nothing to lose.”
The savings are possible for one reason: medical care is often priced with the same maddening, arbitrary opacity as airline seats and hotel rooms.
“The average provider — doctors or hospitals — has between 5 and 100 reimbursement rates for the exact same procedure,” said Timothy Cahill, president of My Medical Control (mymedicalcontrol.com). “A hospital chain with multiple locations may have 150 rates for the same procedure. Consumers don’t know this.” The varying reimbursement schedules, negotiated between the nation’s 850,000 providers and more than 6,000 health plans, have been kept all but secret. Consumers almost never get information on prices before treatment. Even insurers do not know what other health plans are paying. Despite the complexity, the Internet has begun to open a window on this surreal world, allowing consumers to compare costs and, occasionally, to discover affordable alternatives. And not a moment too soon.
Over the next decade, health care spending in the United States will double, to more than $4 trillion a year, 1/5th of the gross domestic product, according to the federal Centers for Medicare and Medicaid Services. Much of the increase will be paid directly by patients. Driven by skyrocketing hospital fees, overall out-of-pocket expenses for consumers will rise more than 5% every year, the federal researchers said. Already, more than 12% of working-age adults have out-of-pocket medical costs greater than 5% of their annual household income, according to the Center for Studying Health System Change, a research group in Washington. “Traditionally, when you went to the doctor, price was never mentioned,” said Paul B Ginsburg, president of the centre. “That’s changing, and I think it’s a healthy change.”
Rudimentary information is increasingly available to consumers. Thirty-two states now require that hospitals provide pricing information to the public. Just this month, the Georgia Hospital Association started a website listing fees of common medical procedures at each of the state’s 141 acute-care hospitals. Some critics say these moves toward pricing “transparency” are largely symbolic, an effort to divert attention from the real causes of health care inflation by placing the onus on the consumer with vague talk of empowerment and choice. “It’s not consumer behavior that is driving rising medical costs in the US,” said Robert G Evans, a health care economist at the University of British Columbia. “It is the folks on the supply side, the doctors and hospitals.” Moreover, the available data are not always useful to consumers, because prices disclosed by hospitals are not the steeply discounted rates negotiated by insurers.
“Consumers don’t care so much what the hospital charges,” said Carmela Coyle, senior vice present for policy at the American Hospital Association. “What they want to know how is much it’s going to cost them out of pocket.”
While only the health plans know the actual numbers, a few websites recently have posted some surprising estimates. Extrapolating from federal Medicare data, Vimo (vimo.com), a small Web start-up in Mountain View, California, tries to estimate the fees negotiated by insurers for a variety of hospital procedures. While the price for a cornea transplant at Wills Eye Hospital in Philadelphia is an estimated $15,000, for example, the reimbursement rate negotiated by insurers is likely to be closer to $4,700, according to the website. The reimbursement rate nationally is still lower: $3,900, by Vimo’s calculation. “We were shocked,” said Chini Krishnan, chief executive of Vimo. “We had no idea that the pricing inefficiencies could be so extreme.”
This kind of comparison shopping can be deceiving, some experts warn, because consumers cannot judge the quality of care from fees alone, and different patients require different treatments. Still, even rough approximations can be useful, particularly for the increasing numbers of patients with high-deductible plans or no insurance at all.
My Medical Control also provides a first glimpse of what free-flowing price data can do for patients after treatment. From a variety of public and private sources, Mr Cahill said, the company has put together a database detailing the wholesale reimbursement rates paid by major insurers for thousands of procedures. In essence, My Medical Control claims to know the lowest rate that a hospital or clinic has already accepted for a given service. If a client is not being billed at that price, then the company’s representatives will call and bargain for it. From a typical claim of $1,100, Mr Cahill said, the company shaves an average of $232. “The higher your deductible, the less the health insurance company is providing oversight on your claim,” he said. “It’s not their money.”
The market for services like Mr Cahill’s is likely to grow, and fast. According to the federal researchers, out-of-pocket expenses for hospital patients will rise 9.1% this year alone.
We Have 150 Different Prices Depending on Lots of Things...
Airline travel has gone from posh to steerage in a very short time.
- Captain Scott McCabe
Source: Funny Times November 2000
If Airlines Sold Paint
This e-mail came over the Cyber Check In counter this week. Warning: content may offend airlines.
Customer (CU): Hi, how much is your paint?
Source: Check In, a weekly column in one of the two daily Wellington newspapers, but I no longer know which one. Unfortunately, I've lost the date as well. I probably shouldn't even use it, but I thought it was funny. My apologies to the unknown author, whoever and wherever he or she may be.
A young blonde lady phoned the local airline ticket office and asked the clerk, "How long does it take to fly from New York to Los Angeles?"
The clerk answered, "Just a minute..."
The blonde said, "Thank you!" - and hung up.
Air Fare Loopholes - The Ultimate Airline Bluff?
If you want to hire a rental car for 6 days, it is cheaper to pay a full 7 day weekly rate than it is to buy 6 days at the daily rate. And, if you return the car before the full 7 days is up, the rental car company thanks you for giving them back their car early. They don't insist you leave it parked on the street for another day!
Amusement parks sells ride tickets at 70¢ each, or 20 for $12. If you want 18 rides, it is cheaper to buy 20 bulk rides for $12 than 18 single rides for $12.60. But when you leave the amusement park, no one searches you to make sure you have used up all your ride tickets. They're happy to have sold you 20 tickets, even if you didn't use them all.
The local bus operator sells one month passes that are cheaper than buying a bunch of individual tickets for daily travel. They don't insist you ride the bus every day, or even at all! They're happy to sell you the pass whether you use it or not.
But, buy an airline roundtrip ticket and the airline claims that you must fly every flight on the ticket you purchased, even though it costs them more money than if you only fly some but not all the flights on the ticket. Why?
The Three Classic Loopholes
These are the three classic loopholes in the airlines' current fare rules:
No One Forces the Airlines to Sell Cheaper Roundtrip Tickets
Let's understand one thing up front. This is a "problem" entirely of the airlines' own making. It is a very strange piece of pricing logic to sell two units of any product for less then the price of a single unit of the identical same product! But what changes the situation from strange to arrogant lunacy is that, after having set themselves up so as to encourage people to buy roundtrip tickets, whether they need to travel all segments of their journey or not, the airlines try and police your use of the ticket and demand you fly every flight, and also restrict your ability to fly on other flights, on other tickets, during your first journey.
What Happens if You Get Caught?
Reportedly, if the airline detects you are trying to use back to back or throwaway tickets, they will probably cancel the ticket you are using and require you to buy a new (most expensive possible) ticket to complete your travels. If they detect this before you travel, they might contact you in advance, or they might just wait to trap you at the gate when your options are most restricted. If they detect this after you have completed your travel, they might take away some or all of your accumulated frequent flier miles. Some people suggest that the airlines will charge the extra fare that they claim you owe them to any credit card of yours that they might have on file. (This may merely be an "urban legend".)
However, one thing the airlines delight in doing is turning around and charging the travel agent that sold you the ticket the difference in fare between what you paid and what the airlines claim you should have paid! They essentially tell the travel agency "either you pay us this money or you'll never issue one of our tickets again"! Doesn't give travel agencies much choice, does it?
Wanted : A Brave Volunteer!
There you are - its 5pm on a Friday afternoon, you're at the airport gate and about to fly home for the weekend when the airline says "sorry, but it will cost you another $500 to get on the plane because you broke our fare rules." What are you going to do? Stay in that far away city for months or years while you file a law suit and spend tens of thousands of dollars (or even much more - you know the airlines will fight you every step of the way) to force the airline to accept your ticket? Of course not. You're going to give the airline the $500 and rush onboard. Wanted: A volunteer to agree to bring a major test case against an airline!
Reductio Ad Absurdum
Imagine this. You fly half a roundtrip ticket but for some reason are unable to complete your journey. For example, perhaps your ticket was good for a maximum one month stay, and the cost of getting it extended for a longer stay is greater than some other way of travelling back home. So, you go to the airline and ask for a refund on the unused half of the ticket. Okay - so I joke - the chances of getting money back on a discount ticket are minimal; but you hope to perhaps get a credit for future travel. Instead, the airline demands you pay them more money for the privilege of not flying. Or call the cops and file criminal charges against you. Or announce that, even though you're a super-elite quadrillion mile frequent flier with them, with enough miles in your account to fly to the moon and back, they're closing your frequent flier account and you forfeit all your miles!
It sounds ridiculous, doesn't it? But the airlines claim that their "contract of carriage" gives them the right to insist on this. Let's examine this issue.
Legalese - the Airline Side of the Game
The airlines attempt to include language into their Contract of Carriage to force you to fly all flights you book and pay for. Stated simply, the airlines seem to be saying that they forbid you to buy the cheapest fare they have on offer. They are trying to control how you use the ticket you have purchased. And now for the great big unknown: Are these terms enforceable in a court of law? Just because something is written in a contract doesn't make it enforceable. Many different types of provisions in contracts are either illegal or unenforceable, and indeed many standard contracts are often substantially rewritten by the courts if either party is trying to enforce or contest them.
In addition to the language in their contracts, some states have laws that include, under the criminal definition of "theft of services" the act of failing to pay the legal fare for air transportation. If you somehow sneak onto a plane and don't pay anything for a journey, then in some states you have clearly committed the crime of stealing an airline service. But what about if you legally buy a ticket, direct from the airline, and then don't fly all the flights on the ticket? You've actually used fewer services than you bought! Is that a crime? Attorneys are unclear about the finest shades of law underlying such a situation, but most generally concede that it would be very hard to get a jury to convict you.
What Do the Courts Say?
There have been very few situations where the courts have had an opportunity to rule on these issues and there has never been a situation where an appellate court has made a decision that would be influential or binding on future situations. It would seem that the airlines are reluctant to have their contracts of carriage tested in court, and prefer to rely on the bluff that, most of the time, seems to succeed. Indeed, one reader tells about a time when he got into an argument when leaving a flight at an earlier point (on a hidden city ticket). He encouraged the airline to sue him, but nothing came of it.
In one civil case (which the traveler brought to court, not the airline), the court ruled against the airline. The court ordered Delta to give back the frequent flier mileage it had impounded from the traveller as a penalty for the use of hidden city fares. Delta didn't just lose, but suffered a massive and decisive defeat. This suggests that the airlines are on shaky legal ground.
An attorney that specialises in travel-related law says that he has brought a number of actions against airlines in the past. He says that the airlines resist all the way to the courtroom door, and then, just as the case is about to be heard, settle out of court so as to avoid getting a case on the record. Unfortunately, the terms of the settlement are always required to be confidential as part of the settlement agreement, so there is nothing official for anyone to go on here, other than - well, shall we say, a vague feeling that the airline settlements may tend to be favourable for the passenger!
In May 2002 a Federal Court judge in Detroit certified a class action brought by a group of passengers accusing Delta, Northwest, and US Airways of acting in a conspiracy and of maintaining monopoly prices on routes to their hub airports by refusing to allow passengers to do hidden city ticketing. The airlines contested the class certification, claiming that the passengers should be required to sue individually. They claimed that the facts of the individual claims are too diverse to be tried collectively. The lawsuit presents "highly generalised hub-based evidence, which lumped 234 separate antitrust markets into a one-size-fits-all analysis," lawyers for Delta and Northwest said in court papers. This has always been the airlines' first line of defense - to make any lawsuit too small and trivial to justify the cost of bringing it against them. In November 2002, the 6th US Circuit Court of Appeals refused to hear the airlines' appeal against the action being certified as a class action. In June 2003, the US Supreme Court also refused to hear the airlines' appeal, meaning that this action will now proceed. The plaintiffs are seeking damages of almost $1.5 billion, which under anti-trust law would triple to $4.4 billion if the case is won. It will probably be several more years before the case is heard and appealed and appealed.
Travel Agencies - The Meat in the Sandwich
If you're going to try and exploit airfare loopholes, it would be a kindness not to buy the tickets through a travel agency - airlines will typically then charge, not you the traveller, but the travel agency for the extra fare cost. That was bad enough when travel agents made 5% on selling you a ticket. They make $10 on selling you a $200 ticket, then the airline charges then a $500 penalty for doing so - a totally disproportionate charge! But now, with agencies earning no commission at all, having the airline fine them for something they have no control over seems extreme.
May I suggest you buy your tickets direct from the airline itself, or from their website. Imagine the pleasure you'll get from telling an airline gate agent "Wwhat do you mean, my ticket is invalid? You people sold it to me yourself!" Former airline employees have even confessed to me that their airline deliberately turned a blind eye to such practices in the past (while still fining travel agencies that did the same thing).
A More Legal Variation of Back to Backs
The more closely legal your strategy is, the less likely it is to attract negative scrutiny. Using again my Syracuse examples, let's say that you fly regularly to Syracuse for each working week, but return home for the weekends. Here is a close-to-100% legal way of enjoying back to back tickets. Buy a one way ticket from home to Syracuse. Then, buy roundtrip tickets from Syracuse back home for each weekend, and back to Syracuse again. You are now traveling on each ticket, in perfect order, with no other tickets in the middle. But the airline audit computers may still spot this behaviour, and they might have a confrontation with you, if they know that your home address is not in Syracuse. How would they know this? By your frequent flier details!
Frequent Flier Numbers Tell All
The easiest way for an airline to track everything you do is by your frequent flier number. This immediately enables the airline to conveniently match up all the tickets you buy (and they know from where you bought each ticket, when you made the booking, when you paid for the ticket, and everything else about your travels) and the way you use them, and where you live. If you want to "stay under the radar screen," then any dubious ticket you use must not contain your frequent flier number. Don't feel bad about this - the money you save is worth a great deal more than the miles you lose. The key thing is to make it difficult for the airlines to match your various flights up with each other. Frequent flier numbers make this easy.
Joe Smith and Joseph Smith, at Home and at Work
Make it more difficult for the airline to match your travels. Do some of your travelling with one variant of your name, and the rest of your travelling with a different variant. Maybe your name is Mary Susan Jones. Who isn't to know that you prefer to be called Susan rather than Mary? As long as your driver's license or other photo ID such as passport shows both names in full, sometimes buy tickets as Mary Jones and sometimes as Susan Jones. Misspelling or transposing a couple of letters in your last name seems to foil their computers as well.
And, to encourage the appearance of different personas, use a home phone number for one variation of your name and a business phone number for the other. Sometimes use a cellphone number. Buy the tickets from different agencies or, better still, when buying dubious tickets, buy them direct from the airline so as to be able to say "but you sold me the ticket yourself and never told me I couldn't do this."
Don't forget to use different credit cards, too! Remember, anything that goes into your airline record can be matched against other records, so try and keep your two personalities as different from each other as possible, with little or nothing in common that could match them together.
Keep a Low Profile at the Airport
Conventional wisdom says to be as friendly as possible with gate agents in the hope of being remembered and therefore being more likely to get upgrades. But, if you're trying to beat their systems, try to avoid being recognised by airline gate agents. You don't want them to get curious about your travel patterns. It is fine to be as friendly as you like with the cabin crews on board, but avoid the gate agents. There are exceptions to this situation, of course, but don't rely on this, though it seems some airline people have retained some common sense - they'd rather have all of your business, even at low yield, as this story confirms :
The Beauty of Competition - and the Danger of Cooperation
This is the closest to a bulletproof strategy that exists.
Fly two different airlines for the two halves of your travel. The chances of two completely unrelated airlines being able to look and see what your travels are like on each other are minimal to zero - for example, it is highly unlikely that American would allow Delta to access their computer flight records. But the chance of an airline being able to see what you are doing with a partner airline is much greater if you use the same frequent flier number with both airlines. For example, don't fly Northwest one way and Alaska the other way and use your same Alaska frequent flier number with both airlines. Don't fly on two Star Alliance (or Oneworld) partner carriers.
Can the airlines legally require you to buy the highest, rather than lowest, fare applicable to your travels? The airlines insist they can, and because they control who gets on their plane, they have the ability to enforce this - "might makes right" seems to be their strongest claim. As to the ultimate legality of their case, they have conspicuously avoided any opportunity to have their claim tested in court. But, if you feel that the airlines are wrong in their claim, and choose to fly in the way that suits you and gives you the lowest cost, you are probably best advised to do so in an inconspicuous manner so as to avoid the risk of a nasty confrontation at the gate just as your flight is about to depart, or unless you have the time and money to become a "test case" through the courts.
Source: thetravelinsider.info originally published 23 August 2002, last update 4 January 2005
I have mixed feeling about the advice given above. Airlines have many routes that are "convenience" routes on which they make little if any profit. They could do away with their two-tier system and charge economy class passengers more and business/first class passengers less. Is that what we all want? The silly-sounding rules are the way they try to distinguish tourists from those travelling on business and no, it isn't perfect - or even close. But if everyone is successful at beating the system, then the system will change - probably for the worse.
That said, if fares were more affordable, I would certainly fly more often. (But would that be a good thing?)
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