Airline price discrimination

Price discrimination involves charging different prices to different sets of consumers for the same good or service. So when you are on your next flight there are going to be different fares for the same class of seat whether it be in economy, business class or first class. What variables at work to bring about price discrimination in airline routes?

• What day of the week you fly – Monday and Friday are usually peak times for business so you should find that fares are expensive. Also because it is usually for business purposes it is assumed that firms will be paying for the flights and therefore are prepared to pay more.
• Times of the day – morning and evening tend to be more expensive as this is peak time.
• How competitive the route is – if there is a lot of competition fares will be cheaper to the extent that there maybe predatory pricing. There is a good piece in the video showing the fares for flights from Montreal to St Johns Newfoundland. Once low cost carriers entered the market Air Canada dropped their price below cost.
• Reputation of each airline – better reputation = higher fare

The video below is a very good especially the fare structure on the New York to Los Angeles route.

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A2 Revision – Price Discrimination

Here is a great video from Tyler Cowen of Marginal Revolution fame in which he explains Price discrimination – Unit 2 in the CIE Economic syllabus. Price discrimination is common: movie theaters charge seniors less money than they charge young adults. Computer software companies sell to businesses and students at different rates, often offering discounts to students. These price differences reflect variations in the elasticity of demand for these different groups. When demand curves are different, it is more profitable to set different prices in different markets. We’ll also cover arbitrage and take a look at some examples of price discrimination in the airline industry

Price discrimination: Auckland – London flights

I came across a useful blog post by Ben Cahill (Senior College) on the Tutor2u site. It involves the price of airfares. The New Zealand Herald found that flights originating in London were significantly cheaper than NZ deals on equivalent trips leaving Auckland.

Fares for Departing April and returning May:
London – Auckland return – booked in UK = NZ$1,620 equivalent
Auckland – London return – booked in NZ = $3,189 (difference of $1569)

Flights out of NZ can’t be booked on Air NZ’s UK website – discrimination by location (third degree discrimination). In the UK the cost of a one-way fare is similar to that of a return.

Reasons for differences:
Greater demand for flights out of Auckland to London.
Exchange rate – 2003 difference would have been $616 instead of $1569

However airline pricing is based on many considerations and is ideal for price discrimination for the following reasons:

* Airlines has some control on the price,
* Buyers have different price elasticities of demand – business travelers vs. vacation travelers (see graph below)
* Each ticket can be sold at a different price, depending on when you book, how you book, the day you book, and so on.
* Software programmes can constantly calculate the empty seats remaining and price them while maximising returns. Yet, competition eats away all those margins. Hence, the tendency to raise revenues from wherever possible.

To maximize profit, the firm sets a price for each group by equating marginal revenue and marginal cost.

Source: Tutor2u