Chapter 50 Question ○43

Why is it so much more expensive to wire between banks than to send money by check? (Xielin Dougonelli) If someone owes you $10,000, there are at least two options for transferring that money from her bank to yours.She can send you a check, after which your bank deposits the money into your account for free.She can also ask her bank to wire the money into your account, and your bank will charge you a fee, typically fifteen dollars for each domestic transfer in the United States.The cost of processing check deposits is actually higher, and banks don't charge for them. Why do they charge for wire transfers instead?

To process a check, it must be handed over, scanned, and in many cases even sent on paper.It can take several days for the money to actually arrive in your account.With a wire transfer, the transfer is almost as fast as the speed of light.The staff of the bank enters the relevant information into the computer, and the account amounts of the sender and receiver are adjusted instantly. Bank wire transfers are more expensive and customers choose to send money this way because of the significant value to them of the speedy transfers.The amount transferred by check is generally small, so delaying getting the money for a few days usually does not cause any serious consequences.Conversely, wire transfers often involve large amounts of money, mostly urgently needed for commercial transactions.Because consumers value the speed of transactions, banks are finding that they can charge handsome fees for it.

So the hurdle you need to jump to save money on wire transfers is waiting a few days for the check to arrive before you can use the money. Next, let's talk about the efficiency gains from discounting.Suppose we call out the students in a class of the third grade and line them up according to their height, the tallest one is ranked first, the second tallest one is ranked second, and so on.Then let the students return to the classroom in order, one every five minutes.So, what happens to the average height of the students in the classroom every time a student enters?Obviously, since the students who enter later are always shorter than the students who enter first, the average height of the students in the classroom will become lower and lower.

This pattern is similar to a cost pattern that has significant correlation with market pricing patterns.In many production processes, marginal cost is lower than average cost (the producer's total cost divided by the total units produced).This cost structure is characteristic of so-called economies of scale production processes.For this process, the average cost falls as the output per unit of product increases, just as the average height of the students in the classroom falls as the students who enter the classroom later are shorter than the students who enter first. To be sustainable in the long run, producers must sell their products at an average price not lower than the average production cost. (If the average selling price per unit is lower than the average cost, the producer must suffer a loss.) But many times, it is to the producer's advantage to sell a portion of the product at a price below the average cost.As long as one more unit can be sold at a price above marginal cost, the producer's profit will increase.Of course, the premise here is that there is no need to lower prices for other buyers because of doing so.

Any seller with a production process with economies of scale will inevitably use the tool of setting discount thresholds.Discounts for price-sensitive buyers without lowering prices for other customers can drive producers to scale up and reduce average production costs. Providing flight services between any two cities is a production process with economies of scale.The more passengers an airline carries, the lower its average cost.One reason is that, on average, the cost per passenger mile flown is lower for larger planes than for smaller ones.For example, for a typical domestic flight, the average cost per seat of a 180-seat Boeing 737︱900 ER is two times lower than that of a 110-seat Boeing 737︱600 fifteen%.The larger the aircraft, the lower the effective average cost per seat mile.

Another factor is that the cost of a given flight is fixed no matter how many passengers are on board.The cost of access to busy airports and the cost of scarce landing and takeoff slots fall into this category.So, as long as airlines can attract more passengers to their flights, the average cost of transporting each passenger can be drastically reduced. Discounts help sellers attract more customers.One of the most effective discount thresholds is the Super Saver fare, which requires passengers to take a Saturday night flight.Airline marketing executives have long known that business people are far less price-sensitive than ordinary tourists.Also, business people generally look forward to spending weekends with their families.On the contrary, the itinerary of ordinary tourists will include at least one weekend.Super-discount packages require passengers to take Saturday night flights, allowing airlines to set a near-perfect bar: few business people are willing to meet this restriction, and most tourists can meet it without breaking a sweat.

Business people are often annoyed that they pay more for their plane tickets than the vacationers sitting next to them.However, airlines can even generate net profits for business people by using the weekend overnight threshold. In the air travel market, convenient scheduling is extremely valuable to business people.But the flight market between any two cities, although the potential traffic is limited.Airlines can economically fly more frequently only with smaller planes, which have a higher average cost per seat.And most tourists are happy to sacrifice the convenience of frequent flights in exchange for the lower prices that can only be achieved by larger aircraft with fewer flights.

Because of the weekend overnight threshold, both types of passengers would be better served if the airline charged everyone the same.In order to attract more ordinary tourists, this threshold allows airlines to adopt larger and more economical aircraft.The resulting savings reduce the additional cost of maintaining the frequent shifts required by business people.At the same time, ordinary tourists also enjoy the convenience brought by frequent flights at the lower fares usually available on jumbo jets. Is it unfair to charge business people a higher rate because they can't accommodate a Saturday night stay?If business people don't need frequent flights, airlines can use larger and more economical planes than they do now.So the higher rates that business people pay reflect, at least in part, the higher cost-per-seat smaller airliners that cater to their needs.

Of course, the discount threshold cannot distribute the airline's costs absolutely fairly.For example, some ordinary tourists need frequent services and are willing to pay high prices.But because they can meet the requirement of Saturday night, they don't need to pay high prices.Likewise, some business people are willing to put up with less frequent flights as long as fares are low enough.But in any case, the current pricing system adopted by airlines is generally fair. The following examples explore some pricing strategies that help producers and consumers share the cost savings of economies of scale.