Since I am a Delta frequent flyer, I use their airport lounges, which I find to be a comfort during layovers and delays. Delta recently raised their annual fee from $495 to $695 to reduce lounge overcrowding. While I was pleased that Delta recognized overcrowding as a problem, I was dismayed that Delta was leveraging high demand to "price-gouge" their valuable repeat customers.
But this price hike is necessary to preserve the status of the lounges as a luxury experience good.
A luxury good offers a superior consumer experience for the few who can afford it. Those who can afford it mind less about price than about over-crowding. In economics terms, their demand for airport lounges is inelastic. In other words, the quantity demanded (i.e., memberships) falls only sluggishly in response to price increases. Technically, under inelastic demand, the percentage decline in quantity demanded is much lower than the percentage increase in price. For example, a 40% increase in price may lead to only a 20% decrease in memberships. As a result, total revenue can increase from a price hike. And those who give up their memberships are customers with more elastic demand who care more about price than about creature comfort.
This price hike in effect kills two birds with one stone. Delta gains more revenue and the remaining members enjoy less crowded lounges.
There is an intangible factor here, namely the risk to Delta of losing some customers’ good will. I plan not to renew my membership as the new membership fee is above my reservation price.
- David R. Schlesinger is an MBA candidate at the University of Memphis, Tennessee.