Question

8. Space Spider Airline is the only airline in Spiderland. The airline has two major groups of passengers – business travelers and vacation travelers. One group of them has its price elasticity of demand at -1.8 and another group has -3.0 respectively. a. Which group, business travelers or vacation travelers, is more likely having its price elasticity of demand at -3.0? Briefly explain your answer.

b. Which traveler group will be charged a higher fare by Space Spider Airline under price discrimination? Suggest THREE practical ways for Space Spider Airline to identify this group of passengers. Explain your answers briefly.

Answer 1

While interpreting the value of price elasticity, always look at the magnitude of the value.

In this case, in absolute terms, |-3| is greater than |-1.8|.

A larger value indicates higher elasticity.

a)

Business travelers have lower price elasticity, while vacation travelers have higher price elasticity. In simple terms, if price of a ticket changes, a business traveler is less likely to change his or her plan.

The value -3 is thus associated with vacation travelers, who travel for leisure. They are much more sensitive to price changes. They will buy a ticket if they get a discount, and they will postpone a trip if it is too costly.

b)

Under price discrimination, a business traveler should be charged a higher price. Due to inelastic demand, he will be ready to pay the higher price. In general, the percentage change in quantity demanded will not change much, but the airline will be able to make higher revenue.

The airline can exploit the business traveler's urgency.

If a higher price is charged to a vacationer, he will simply cancel or postpone his plans. He will purchase a ticket only if it is available at a discount.

Practical ways to identify business travelers:

• Most of their bookings will be in weekdays, and will be return trips. The trip will begin in the morning and end by evening, on a weekday.
• They will specifically book business class, if available. They will ask for business related services, like Wi-Fi lounges, business newspapers, laundry, prepaid meals and so on.
• Their bookings will be through business organizations, and not through personal accounts. This can be verified during the time of booking.
• Based on their travel history and frequent flier accounts, their trip details can be verified. Their trips will be frequent and predictable.