Question

Using the theory of price discrimination, explain why airlines charge higher fares to their customers during Christmas but offer significant discounts at other times of the year.

Answer 1

According to the theory of price discrimination, firms with significant market power can charge different prices from different consumer groups. For this we must prevent resale of their product and they have the ability to segregate the market on the basis of elasticity of demand.

note that when the demand is relatively inelastic higher price is generally charged in order to raise more revenue. When demand is relatively elastic price is reduced in order to increase revenue.

As far as Airlines are concerned, price discrimination is specifically based on the elasticity of demand of regular or business travelers and vacationers. Customers who plan their vacation on Christmas have a very inelastic demand for travelling because they do not want the event to be missed. Because of strong price responsiveness they are charged a higher price so that more revenue can be earned.

At other times of the year the price responsiveness is very strong which means that even slight reduction in the price might bring a large change in the revenue. Due to this reason there are discount offered at other times of the year.