Question

1. Air travelers are sometime annoyed to find that the price of a ticket for a short flight may exceed the price for a long flight. For example, a round-trip ticket from Chicago to Washington Seattle on the airline recently cost $235, compared with the same airline’s price of $278 from Chicago to Moline, which is just less than half an-hour flight, about 160 miles. Travelers complain that such prices represent unfair discrimination against the residents of a medium sized cities such as Moline or Davenport, Iowa. They say that airlines should charge prices that are proportional to the distance flown. The airlines answer that they can serve major city pairs, such as Chicago, Seattle, at a lower cost (with larger planes and fewer empty seats) than less frequently traveled city pairs, such as Chicago – Moline. Do you see the airlines pricing policy in this example as true price discrimination? Discuss the merits of the current price structure and proposed alternative in terms of fairness and efficiency.

Answer 1

This is a clear case of price discrimination.

Price discrimination: It is a pricing policy where companies charge each customer different prices for the same goods or services based on how much the customer is willing and able to pay. for example- Airline tickets are sold at different prices booked at different dates. It happens when different consumers have different elasticities of demand and willingness to pay is different.

Different products have different elasticities of demand and sometimes prices of certain items gets bundled into a package and hence low cost food items also get sold at high price or high price at low prices.

Price discrimination converts a part of consumer surplus into producer surplus. Basic reason why airlines charge differenly is different demand elasticites. However, cost of operation is also a deciding factor. Low level of vacant seats also puts burden on travelers in medium sized city travellers. However, it also makes it economically viable for airlines. Thereare alterbatives available like other modesof transport for those whodo not wish to pay more.

Prices charged as per travel distance will be possible when other criteria are same - costs, number of passengers, tax and other charge uniformity. Hence, in my opinion current price policy is fair. Consumer driven markets will bring more competitors in the market.