Question

Yield management and price discrimination are both designed to increase revenues by charging different customers higher or lower prices. Explain the difference between yield management and price discrimination, and the conditions required to use these methods. Illustrate and explain how yield management is used to increase revenues for airlines.

Answer 1

Ans) Yield management is a pricing strategy, especially used by air travel and tourism related sectors, in order to generate maximum revenue from the airline seats. Yield management is mainly concerned only with the selling price and volume of sales in order to boost the revenue.

Under yield management, certain time constraints resources such as plane seats, can be sold to different customers at different prices. But there are several factors, variables involved, also certain conditions are to be fulfilled.

On the other hand, price discrimination is a strategy used for selling same products to different prices, based on the sellers mindset and his expectations from the customers. Under price discrimination a company tries to make the sales, by identifying different market segments, such as domestic and industrial users, with different price elasticities. In order to achieve a successful price discrimination, companies must be able to control supply. Along with this they must prevent resale of products from one buyer to another. Apart from this there must be a difference in price elasticities in the different markets for the product.

An example of yield management in airline industry; Suppose that a flight has 100 seats which are available for an early morning flight on a Sunday afternoon. The seats can be sold at a discounted price, but instead the firm realizes that the customers are willing to pay full price for seats as Sunday is coming closer.

Further suppose that there is a leisure demand before business demand. Then the airline shall determine the seats for leisure fare and the seats to be kept available for those who would pay full price. If more seats are kept protected, it faces the risk of flying with empty seats. On the other hand, if very few seats are protected, the airline might end up losing out on the revenue that is in general on a regular basis that is generated.