Question

Demand Elasticities and Airline Pricing Round-trip airfares are substantially lower if the traveler stays over a Saturday night. The typical traveler who stays over a Saturday night is a tourist. Airline companies do not offer comparable discounts to travelers who complete the round-trip midweek. These customers are primarily business travelers. Airline companies also offer fewer discounts during peak periods, such as the period around the Thanksgiving holiday. Use what you learn in this week to evaluate the pricing strategy of airline companies.

Answer 1

How does an Air company practise price discrimination?

1. Time of purchasing a ticket-

There’s no hard & fast regulation, but if you purchase a ticket many months in advance it tends to be relatively inexpensive. If demand for the certain flight is high, then the airline begins putting up the price level of that flight. It implies that the left over tickets will only be bought by persons willing to pay a greater price (inelastic demand). If a certain flight isn’t selling too well, the air company will do the opposite & lessen the price.

2. Unsocial hours inexpensive-

As some flight times aren’t too popular, these flights will tend to be relatively inexpensive. For instance, if one takes a weekend break. Most persons would rather come back late on Sunday. These late Sunday tickets tend to be dearer than early morning Sunday tickets.

3. When one travels-

Travelling in peak times will be dearer. One good example is journeying during the week. The reason is that the consumers travelling Monday to Friday are business people. Their demand is more inelastic (as it’s paid for firm expenses). If you are comparatively flexible & willing to journey in the weekend, you are more responsive to price level and have a relatively elastic demand. Fares also fluctuate depending upon the time of the year. During peak summer break, fares are dearer. Parents have an inelastic demand as they cannot go on holiday during term period.

4. Charging for add-ons-

Ryanair charges for extras such as check-in bag. It implies that customers who are not sensitive to price level, may – pay to enter flight early, pay to have a check-in luggage.

5. Airmiles-

Airmiles is not actually price discrimination, but its a method of rewarding loyal customers. The more times you journey with a certain airline, the more air miles you obtain, & hence you obtain a rebate for frequent flying.

Price Discrimination increases revenue for airlines.The MC of an additional passenger is comparatively low. Most of the expenses associated with flying are fixed expenses. If you have one passenger, you have to pay all these fixed expenses for the flight ( fuel, wages, etc). Thus, for maximizing revenue, the airline will want to sell all tickets. Most air companies have invested in expensive ticketing arrangements to manage pricing & demand, to ensure they obtain as much consumer surplus as possible.

Another advantage of price discrimination is that the air company can advertise inexpensive basic tickets but when you pay for all the add-ons you end up paying out a lot more.