Which Price is Right?

When you understand that dilemma, all of a sudden, airline prices don't seem so exploitive. Although all of the seats on that New York - Miami flight are going to the same place, they aren't the same product. You pay less when you commit to a ticket four weeks in advance; Continental assumes a risk for holding a seat until the end -- and wants to be paid a lot to balance the times when saving that last seat for you means that the seat flies empty. A ticket sold a month out and a ticket sold a day out are very different things.

The complexity required to pursue this balance is mind-boggling. Continental launches about 2,000 flights every day. Each flight has between 10 and 20 prices. Continental starts booking flights 330 days in advance, and every flying day is different from every other flying day. Monday is a different kind of day than Tuesday; the Wednesday before Thanksgiving is different from the Wednesday before that. At any given moment, Jim Compton and Continental may have nearly 7 million prices in the market.

And that's just the beginning. All of those prices need to be managed, all the time. All of the major airlines (except Southwest) participate in a joint fare-publishing enterprise called ATPCO. ATPCO collects fares and rules (such as advance-purchase requirements, refundability, and so on) from each airline. ATPCO then publishes those fares back out to the airlines and to the reservation services. In the 1980s, fare changes were filed once a day. If someone changed fares, you found out on Monday and filed your competitive response on Tuesday. ATPCO was closed on weekends. Now ATPCO accepts fare changes three times every weekday -- at 9 AM, 11:30 AM, and 7 PM Central Time -- and once each on Saturday and Sunday. From 5 fare changes a week to 17.

As much as it can look like a kind of silly game -- why not just take a pass on a couple of those changes? -- it's not. "If a sale comes in at 7 PM from a competitor," says Continental's senior director of pricing, Bob Lancaster, "and you miss the 9 AM filing the next morning -- you don't get your changes in until 11:30 -- you're in trouble." So when Continental has 7 million prices in the market, those prices can change not just every day, but several times a day. Typically, says Lancaster, the airlines collectively change 75,000 prices a day. On the morning after someone files a 7 PM sale, there might be 400,000 price changes across the markets.

This frantic tail chasing -- which is done with the help of sophisticated computers and software that predicts ticket demand the way "models" predict the weather -- is not lost on the smart people who do it. The wry, informal motto of the Continental pricing department is: "You're only as smart as your dumbest competitor." If some airline is taking prices on the Atlanta-Houston route into the ditch, then by gosh, Continental is going right down into the ditch with 'em. Usually.

It's easy to be cynical about the airlines; they could do many things better. But they also live in a business environment that would wilt the rest of us -- and might soon. In the airline industry, every competitor knows the price of every product that every other competitor offers and knows instantly of any changes. How would you fare if your competitors knew your prices, and your price changes, automatically?

In the airline business, every customer instantly knows every fare available, and a ticket from any airline is equally easy to buy. How would your business fare if your customers instantly knew the prices of your competitors -- and could buy their products just as easily as yours?

"Are we addicted to the complexity of our pricing?" asks Continental's chief economist, Paul Thomas. "Yes, we are. But we aren't naive about it. We talk about it all the time."

And this complexity that goes with what the airlines do -- this is what's going to sweep through the rest of the economy. Because in just the past few years, the kind of software that the airlines use has become available to any company.

PRICE CHECK (II): SHOPPING FOR AMERICA

Cindy Whittington is standing in a sea of women's coats in a department store in suburban Washington, DC. It is the thick of the Christmas-shopping season, and there are 29 racks of winter coats -- perhaps 700 in all. Whittington has a pencil in her teeth, a three-ring binder on her left arm, and a look of calm determination in her eye. She's shopping, and the fate of the nation is balanced on her arm along with her binder.

Whittington is gathering prices used to calculate the U.S. Consumer Price Index. The mood of the stock market, the wages of millions of union workers, and the Social Security checks of nearly 50 million retirees all depend on the CPI. Given the complexity of the consumer economy, the way that the CPI is assembled remains oddly handcrafted. Some 80,000 prices are gathered each month, mostly in person, by 400 people like Cindy Whittington. For the moment, the prices are recorded on paper and keypunched into computers, although pricers will get touch-screen laptops later this year.