Tyler Cowen’s recent post on price gouging referenced a common misconception about airline pricing:

It is sometimes argued that airlines keep coach quality low deliberately, to raise the demand for business and first class tickets. I don’t know if this is true..

In fact, it isn’t true. Or at least it doesn’t seem to fit the current evidence for domestic flights at all.

• Airlines only sell about 10% of their first class seats domestically. 90% of first class seats are occupied by frequent flyer awards, upgrades given to frequent travelers, and airline employees.
  

• Coach quality has, in general, been rising. American made a fleetwide decision to add 2″ of legroom at every seat by removing a row of seats (They’ve retrenched a bit on some very low yield routes, but this enhancement is still true for the majority of their fleet). United added 3-4″ of legroom to the front of their coach cabins. JetBlue offers all leather seating and satellite TV in their all coach product and next month will be taking out a row of seats to add legroom. Discounter ATA is in the process of doing the same.
  

• Domestic first class quality has, in general, been falling. A sweeping generalization, but there are few exceptions: meals have been cut back (either by removing appetizer courses or going to an all cold offering), hot towels and warm cookies have become rarities, and Godiva chocolates are pretty much nonexistant.

International travel is a bit different. The trend among US airlines has been to improve coach service (the domestic improvements apply internationally, though most of the discounters don’t fly internationally) while reducing service in business and first classes. At the same time, the quality of the SEAT in business and first has improved markedly (close to flat recline in business, for instance). Airlines sell a higher percentage of these seats.

Perhaps the theory of keeping coach awful to encourage first class ticket sales just doesn’t work domestically (shorter flights) and does work internationally (longer flights), but that wouldn’t explain improvements in coach product and deterioriation of first class service.

However, I think the more compelling argument is that increasingly marginal seats are sold close to marginal cost (now more than ever with internet distribution, priceline, hotwire, etc) and higher load factors are necessary to break even. That means stuffing more seats onto the plane – and the biggest difference between coach and business is the seat.

Additionally, the theory would have been even less true before deregulation. When airfares were regulated, airlines still competed in areas other than price. One of the most frequent areas of competition was onboard food. The competition to provide a good meal in coach at one point got so fierce that the CAB felt the need to regulate the thickness of sandwiches!

It’s worth noting that many airlines outside of the US — especially airlines in Asia — are far more successful at selling premium class tickets than are their US counterparts. That may be a function of the quality service they offer. I would argue that ANA, Cathay Pacific, and Singapore Airlines have the three best products in the sky. Their success at selling their premium product may be a function of how difficult they make it for customers to upgrade. And it also may be a function of corporate cultures that permit purchases in Asia that would, in most cases, be frowned upon in the US. But none of that reconciles the original theory with the fact that the Asian airlines providing the best business and first class service also provide the best coach products as well.