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I HAVE PAID for 1st Class.
I have also been upgraded to 1st Class for free once.
I have flown 1st class 6 times in my life, and business class three times.
Each time I've been in 1st class I've enjoyed it immensely.
However, the entire flight, I didn't spend one second considering how or why anyone else was there or got there. I was there, I enjoyed my flight. I really don't pay much attention to people who sit across the aisle from me. If they're not interested in having a conversation or even if they are, I don't care who they are, what they do, or how they got the seat they did. They can tell me and I can tell them about me, but as soon as the flights over, I don't give a darn.
Not only is the likelihood of me finding out if the other person got in for free next to nothing, but if I did find out I paid for it and they didn't, the only real response I could have would be, "good for them."
Your argument is comparable to complaining that it's not fair that some people win the lottery and some people have to earn money. Sucks that it wasn't you, but why should you be mad at them?
Ever get a hotel room upgrade? Wasn't it great?. Car rental upgrade? Same thing. Ever get a free desert at a restaurant cause the waiter screwed up your order or spilled a drink? What about great seats at a sporting event because it was undersold? All the same type of thing.
It's called customer service. If the customer has a valid claim to some injustice or special need and the upgrade is available, there is no reason to deny it. The corporate offices know this, the reservation agents know this, the only real dunder head, stickler, nazi-strict, nay-sayers are the flight attendants who get off on the power they are suddenly given.
You are right it is a product people pay for... with a heavily marked up ticket value. So if someone got it on the cheap or free and I found out, only words that come to my mind are, "Lucky" and "good for them".