Column: The economic lesson behind $5 airport water

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Water bottle airport. Travel. Photo by Flickr user Leo Newball, Jr.

Competition is allegedly the magical equalizer, but it doesn’t work at airports thanks to monopoly pricing, writes economist John Komlos. Photo by Flickr user Leo Newball, Jr.

I just paid $5 for 85 cents worth of water. Can you guess where I was? No, I was not at the Ritz-Carlton but at my local airport over the holidays. “Big deal,” you say. “That certainly isn’t going to bankrupt you.” Maybe not. But it is a good economic lesson in the way the real economy works rather than the way it is supposed to work on academic blackboards or in the fantasy of market aficionados.

“The invisible hand is often invisible, because it is often not there.”

Competition is allegedly the magical equalizer. If one firm is too powerful and greedy, other suppliers are going to undercut it, and consumers will flock to the lower-price outlet. The invisible hand is going to stifle the greedy firm and consumer sovereignty will prevail.

Sounds nice, right? But it doesn’t work at airports thanks to monopoly pricing. What does that mean? Well, there are but a handful of companies selling water at an airport, and they have a captive market, so they agree to set the price in such a way that they extract the last possible penny from the consumer. That is the idea behind “charging what the market will bear.” In other words, they collude and agree — tacitly perhaps — not to undercut one another. A firm knows that if they do lower the price, others would follow suit, and in the end, it will sell the same amount of water at a lower price. Both firms will lose, and the profits of all the firms would diminish. In order to avoid such a price war, the firms realize that it is better not to lower the price in the first place.

As the Nobel Prize-winning economist Joseph Stiglitz keeps on reminding us: “The invisible hand is often invisible, because it is often not there.”

Of course, such conspiracies happen all over the economy. In fact, Adam Smith wrote about it in 1776: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Remember the Libor scandal in which many major banks, including Citigroup and JPMorgan Chase, colluded to rig interest rates in their favor? That took trillions of dollars out of our pockets by rigging mortgage rates and student loans rates and put it into the pockets of the 1 percenters. That’s more consequential than my $5 water bottle, but the principle is the same: the misplaced exercise of power to rig the market in such a way as to extract the last bit of profit from the people on Main Street.

Charging monopoly prices at airports is particularly onerous, because it is the Transportation Security Administration that prohibits us from taking water with us. So it would behoove the government to protect us from such extortion, inasmuch as it is the one forcing us to be in such a subordinate position in the first place. So it should be government’s responsibility to protect us from price gouging.

Caveat emptor — buyers beware — is not a useful principle when the two sides to a transaction are not on an equal footing.

We are powerless to fight back without government support. That is why we need consumer protection and not only in financial services. We need protection for the smaller things as well, like the price of a basic need, such as water at airports. Caveat emptor — buyers beware — is not a useful principle when the two sides to a transaction are not on an equal footing.

Well, I did not have much luck this time — the flight was delayed, and I had to buy another bottle, which I left on the airplane when we switched planes to catch a connecting flight, so I had to buy my third bottle. Then my wife also bought a bottle, and of course, I was thirsty on the way back too, so the short story is that I exhausted my water allowance for a long time to come. I think I’ll write my Congressman. Maybe he can do something about it.

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