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Embry-Riddle Aeronautical University (Worldwide)

Written Assignment 3: Airline Pricing Research Assignment

Edwin Udeh

MBBA 523

August 2015

Price discrimination is the practice of charging different prices to consumers for the same good or services (Baye 2014). Three types of price discrimination are first, second and third degree price discrimination. The paper will discuss more about third degree price discrimination as it relates to airline business. Third degree price discrimination is charging a different price to different demographics of airline passengers. Airline can increase its revenue by charging different group of passenger’s different airfare for the same service. Requirements for third degree price discrimination to be effective is as follows

* Difference must exist in the elasticity of demand of different

demographic of the passengers.

* The airline must have a way of identifying the elasticity of demand by

different demographics of passengers; if not the airline has no way of

identifying which group of passengers it should charge the higher fare.

* Must have the ability to prevent resale between the passengers who

saved money to buy ticket from the passengers who purchased at a low

fare.

The airline exploit the demographic of passengers with price inelastic demand by charging high fare and then set rather low air fare to the group of passengers with a price elastic demand and drive their demand. The reason is that the loss of passenger surplus for the group with a price inelastic demand may outweigh the profit in passenger surplus for the group of passengers with a price of elastic demand.

(THIRD-DEGREE PRICE DISCRIMINATION, 2015)

The colored fields have been the profit of the monopolist.

The pricing discrimination has been noticed in the price of the airline fare. Most often this has been noticed that when passengers booked their ticket in advance fares are less as compare to the late bookings. Such passengers, who had booked the ticket late then they suffered as they should pay higher fare whereas early bird passenger pays low as of early bookings.

Implementation of price discrimination have been full of conflicted view. In the airline business, it has been good like this makes much more profit as compare to the uniform prices where marginal revenue is equal to marginal cost has followed. For customer there have no losses such as every kind of customer pays in the line with their wish for paying.

This has stated that values of seat, who had booked seats late are not similar because values to such people who had booked the seat early. When person want to go for an essential meeting then he can purchase the late ticket but seats can be much more values for him, so this is justified for charging high prices. For the society or economist, such strategy has been mixed reaction.

On one side, the total result has been high with the discrimination than with one pricing policy; impact on customer surplus is not obvious. Sums of the surplus had gained through both the groups may enhance that of customers charged a one price. Only issue is that the society has frowned on the abnormal profit as well as accuses the air lines for gaining profits from the helplessness of customers along with lacking of same alternative mean of transportation, but in economic senses there has been nothing in-efficient of pricing discrimination.

I have chosen the destinations of the Philadelphia as well as departure from the Atlanta. Site used for getting the prices had been (Expedia, 2015), which is a famous travelling web, which gives price for each airline. I have chosen for returning the subsequent days in every of four cases. I have chosen 11th July for case 1 (for one day before booking), for the departure as well as 12th July as returning date.

Below table has clearly shown the pricing discrimination because the extents of the advance bookings. This has also shown variations in the price in all the air lines for similar dates, similar advance bookings status as well as destination along with the departure point. I have been chosen two air lines, the Delta airline that is network airline as well as Frontier Airline, which is lower cost airline.

For every airline price is varied based on the extents of the advance bookings. For the Delta airlines difference had been 688 - 370 or one day before bookings had been eighty five percent much more costly rather than four weeks advance bookings. Such comparison is impossible for the Frontier Airline because no flights were available for one day before bookings. I had compared one week with four weeks for both of the air lines.

Delta airline has been sixty one percent much costly for one week before bookings, whereas Frontier airlines has been seventy one percent much costly on similar parameter. So, there has been huge correct variety in the price in the air lines and also big relative differences. It has been ample proofs of the pricing discrimination had been based on the gap in between the bookings dates as well as departure dates.

Table 1

(Expedia, 2015)

References

Baye, M. R., & Prince, J.T. (2014). Managerial economics & business strategy (8th ed.).

New York, NY: Irwin/McGraw-Hill.

Drake, M. (2005). Price Discrimination Notes. Retrieved from:

http://www2.isye.gatech.edu/~jswann/teaching/6230/PriceDiscriminationV2.pdf .

Expedia. (2015). Retrieved February 22nd, 2015, from http://www.expedia.com:

http://www.expedia.com/

THIRD-DEGREE PRICE DISCRIMINATION. (2015). Retrieved February 22nd, 2015,

from http://www.amosweb.com: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=third-degree+price+discrimination