5. Read the 2015 article “Why Gogo\'s Infuriatingly Expensive, Slow Internet Sti

Question

5. Read the 2015 article “Why Gogo's Infuriatingly Expensive, Slow Internet Still Owns the Skies” from Bloomberg Businessweek found at (article is also available as a PDF on Blackboard): http://www.bloomberg.com/features/2015-gogo-airplane-wireless-internet/

a. We discussed three conditions necessary for price discrimination. Does Gogo’s in-flight Wi-Fi service satisfy these conditions? Explain.

b. “… Gogo charges more on a flight from New York to San Francisco (typically about $33) than it does on a flight from Detroit to Miami ($10). JFK-SFO is full of business travelers who want to be connected much more than passengers on the other flight, who are probably on their way to the beach and just want their kids to shut up and watch a movie.” “Gogo has gotten away with these pricing games, because its main demographic, business travelers, are so price-insensitive. For them, staying connected is a necessity, not a luxury, and they tend to be on expense accounts, so it’s someone else’s dime.” Discuss how these statements reflect a form of price discrimination used by Gogo. How might elasticities differ between consumers on the two flights in the first quote?

c. “Gogo’s two main competitors, ViaSat and GEE, use satellites exclusively for customers such as JetBlue and Southwest. Both services have faster connections and lower prices, yet neither has dented Gogo’s dominance. That’s mainly because Gogo did a good job early on of locking up airlines into decade-long contracts. Gogo will install and maintain the equipment across a fleet for 10 years and share the Wi-Fi fees with the airline. As soon as the contracts are signed, hardware lock-in takes hold. Gogo (and ViaSat and GEE) equipment is proprietary, so switching providers means switching servers and antennas and everything else.” Discuss the implications of this statement on Gog’s ability to maintain market power in the future, and continue to price discriminate.

Explanation / Answer

5.a) First,based on an analysis of internet usage by individual passengers,Gogo is basically able to implement a dynamic pricing strategy which is driven by market segmentation.As there are relatively higher number of business commuters travelling in New York to San Fransisco flight than the Detroit to Miami flight,Gogo can perhaps charge higher(nearly $33) for its service in the former and lower(about $10) in the latter one.It can be reasonably assumed that business passengers usually use internet as a necessity due to the professional/occupational demand thereby exhibiting a comparatively lower price elasticity of demand for in-flight internet connectivity,whereas the predominantly recreational commuters travelling in the Detroit-Miami flight would probably use internet for casual surfing and personal enjoyment,hence showing a relatively higher price elasticity of demand for in-flight internet services.To maximize revenue generation,Gogo would understably charge a higher service charge for business commuters compared to the recreational counterparts.Therefore,Gogo has been able to exploit the differences in price elasticity of demand for its service and implement discriminatory pricing strategies based on market segmentation.

Secondly,as stated by the Bloomberg article referred to in the question,lack of any initial market competition has significantly enabled Gogo to gain much market power to exercise price distinction.As the articles highlights,the in-flight internet service provider owns almost 80% of the market(much of it is evidently attrituable to lack of serious market competitors) leaving very little option for commuters to use any other service/s.Thus,considerable market power has facilitated Gogo to consolidate its discriminatory pricing strategies.

Thirdly,the article also discusses the long term contract that Gogo has been able to establish with the Airlines thereby strenghtening its market power against its two major competitors in the market,Viasat and GEE.Effective implementation of market strategies to ward off competitive forces and maintain market power is another factor behind Gogo's market dominance and discriminatory pricing despite allegedly dismal service.

b) As discussed in part a),the demand for on-board internet service will be considerably higher among business commuters than the recreational counterparts as practically it is considered to be a necessary service for the business passengers unlike luxury good as regarded by the recreational and other passengers.Consequently,the price elasticity of demand for in-flight internet service would be lower among business commutersas internet connectivity is almost indispansable due to their occupational requirements and necessities.Alternatively,the recreational commuters would predominantly use in-flight internet for their personal recreation and enjoyment such as watching movies,online videos,surfing net,using social media websites and so forth.Thus,the price elasticity of demand for on-board internet service among these commuters would be relatively higher than the business commuters as they would be more price sensitive.

In this context,Gogo basically exercises price distinction based on market segmentation where it charges higher service charge for business commuters compared to the recreational passengers(as the articles points out,Gogo charges almost $33 for passengers travelling in New York-San Fransisco flight and about $10 for the ones travelling in Detroit-Miami flight) to maximize revenue and subsequently,profit.This is basically price discrimination through market segmentation or division as Gogo can charge higher service charge for commuters with lower price elasticity of demand than with higher price elasticity of demand.

c) As mentioned earlier and in the article,Gogo usually enters into long term contract system with its client Airlines which makes its service equipments such as antennas,servers etc proprietory implying that if these Airlines intend to change service provider they would have to switch the equipments as well.From a microeconomic point of view,this can be seen as a market strategy traditionally used by Gogo to challenge its main competitors,ViaSat and GEE.Contract system is ideally a market instrument to ward off market competition and consolidate market dominance/power by the implementing firm.Alternatively,it can be seen as a strategy to move towards monopolization or gain absolute market power and consequently enhance the chances to exercise discriminatory pricing strategies.Hence,in this case,long term and stringent contract system with its client Airlines would enable Gogo to further entrench its market dominance/power and remove any potential barrier in its way to effectively maintain its discriminatory pricing policies.

Citation

http://www.bloomberg.com/features/2015-gogo-airplane-wireless-internet/

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