How Price Discrimination and Inequality can Benefit the Poor and Middle Class

Do you sometimes look down upon the “fat cats” who sit in first class seats on an airline, or who enjoy spacious suites on a cruise ship?

Think again! Price discrimination and inequality may be responsible for your cheap ticket on an airline or on a cruise ship.

The fact is that most of the revenues earned by airlines and cruise ships come from wealthy and business clientele. According to the International Air Transport Association, first-class and business-class passengers make up only 8% of international travelers but account for 27 percent of revenue — and most of the airlines’ profits. Higher prices for the rich and the business class allow the travel industry to keep prices lower for those traveling in coach.
The social hierarchy is more evident on giant cruise ships, where there may be ten different levels of cabins, from the richest to the poorest. Critics often decry the cruise industry’s segmentation of customers into different accommodations with vastly different prices as a departure from the American spirit of equal opportunity.

But they forget that the high-priced suites account for most of the cruise ship’s profits and allow millions of middle-class citizens to travel the same route and enjoy the same food and entertainment. The profit margins are relatively low on the middle-class passengers compared to the wealthy.

As one commentator recently wrote, “Every month, almost 100,000 people enjoy 7-day adventures on ships of the Royal Caribbean Cruise Lines. That’s almost one million people every year, on just one cruise line, and not counting the more common 4- and 5-day cruises. That’s an awful lot of people enjoying fresh air, a reprieve from work, celebrating an anniversary or retirement or just getting the family away from all the electronic distractions.”

Travel is just one example of what Rollins College Professor Ken Taylor calls “natural income redistribution.” He has been teaching this little-known benefit of free markets to his students for twenty years. He notes that the private sector has its own way to redistribute wealth and income without resorting to the legislature passing progressive taxes or other forms of government redistribution schemes. Professor Taylor does, however, point to examples where the poor sometimes pay more for services, such as flights and private mail to rural areas.

We normally think of price discrimination as bad, but here it results in the wealthy voluntarily subsidizing the middle class and the poor.

We witness the benefits of natural redistribution from the rich to the poor all the time in commerce.  Lately we’ve seen it in high occupancy toll (HOT) lanes, derisively called “Lexus Lanes,” which provide much-needed revenue to pay for the upkeep of roads.

But we also see it in sports stadiums financed by billionaires and attended by fans with average income… museums built by wealthy patrons and visited by avid customers who pay a small fee (and often no fee) to enjoy beautiful paintings or sculptures… top colleges and universities where rich parents pay full tuition and fees, which in turn allows poorer students to apply for aid and scholarships at colleges and universities… and donations to churches and non-profits by the relatively well-to-do to help pay for needs of the poor and assistance during natural disasters.

The rich are different, after all.  Without any government interference, the marketplace of the rich indirectly helps the poor and the middle class.

Attention, Florida Subscribers!

For those of you who live in the Orlando area, I will be giving a lecture at Rollins College in Winter Park, Florida, next Monday, Sept. 12, at the Crummer Auditorium at 7 pm on the subject, “What Really Drives the Economy and the Stock Market: Consumer Spending, Government Stimulus, or Business Investment?” I will be discussing how Gross Output (GO), my new statistic now published quarterly by the federal government, can be used to better measure economic performance and can make you a better investor. See you there!

In case you missed it, I encourage you to read my e-letter column from last week about Trump’s stance on the U.S./Mexico trade relationship. This article, and many other past Investor CAFE columns, can be found on StockInvestor.com, new home of Eagle Daily Investor. I invite you to bookmark the site and follow it on Facebook and Twitter.

Upcoming Conferences

O “Investing in Art & Rare Tangible Assets Seminar,” New York, New York,October 24-25: The Oxford Club, led by investment writer extraordinaire Alex Green,will be hosting a special two-day seminar on investing in art and collectibles. I’ve just been added to the program to speak on “Investing in Rare Financial Books for Fun and Profit.” I’ve been a collector of rare financial books for years, and have profited handsomely. (I’ll also reveal my secret way to save 20-30% off all artwork and collectibles.) Other speakers include Geoff Anandappa and Richard Gladdle, of Stanley Gibbons, to discuss rare coins and stamps…James Forsyth on investing in wine… and Marsha Malinowski and Clive Moss on investing in fine books and manuscripts. The seminar will include a private tour of the Metropolitan Museum of Art by its President Daniel Weiss, and a visit to Sotheby’s. What fun! For more information, please click here or contact Oxford Voyager Club Concierge Kiara Laughran by phone at 443.708.9411 or by email at voyagerclub@oxfordclub.com. She will be happy to help you.

O New Orleans Investment Conference, Oct. 26-29, Hilton Hotel: I’ve been speaking at the New Orleans conference since the late 1970s, and I consider it the “granddaddy of investment conferences.” If you haven’t been to New Orleans, it’s a great city with five-star restaurants, beautiful music (jazz) and fun things to do. At the conference, I’ll be moderating the economy panel with Peter Schiff, Stephen Moore and Peter Boockvar, chief market analyst for the Lindsey Group. Other speakers include Dennis Gartman, Charles Krauthammer, Marc Faber, James Grant, P. J. O’Rourke, Doug Casey, Adrian Day, Pamela and Mary Ann Aden, Brien Lundin, Robert Prechter and Rick Rule. To sign up at a discount, call 1-800-648-8411, or click this link.

You Nailed It! Free Rider Issue Not a Problem in Wealthy America

I’m always amazed at the number of items that are available for free in America.

Today I played basketball at a local college where I used to teach, and didn’t have to pay to enter the spacious court and play a pick up game.

Afterwards, I passed by the economics department building and picked up a copy of today’s New York Times — available for free to students, faculty and guests.

I drove over to the Whole Foods Market and a gal was offering free samples of crackers and fish spread.
Then I drove over to the Publix supermarket and another lady was offering free samples of a quarter-sized hamburger and French fries (that was a new one to me).

Of course, I bought some food items at both stores, which is what they hope I will do as a customer. But I’m sure there are people who sample the food and don’t buy anything.

A rich country can afford free riders as long as it’s a small percentage.