Question

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

a. Business travellers are less sensitive to change in pries or air fare as compared to vacation travellers. Thus, elasticity of -3.0 is expected to be that of vacation travellers. This is because vacation travellers have close substitutes of airlines like railways and other transports where as business travllers focus on high quality and time saving modes, this is why business ticket is always expensive than normal ticket as they are very less sensitive to changes in prices.

b. Under price discrimination, business class travellers would be charged a higher fare as demand for the airline tickets would not go down much even by increase in prices as business travellers are ready to pay higher fares.

Three ways in which Space spider airline can identify these type of customers are:

1. People who are frequent flyers with the airlines and generally purchase business class tickets for the travel

2. People who are travelling from business generating area or metro cities to other such areas can be an evidence of business travellers

3. People who generally tend to pay higher prices for tickets as per their past travel history or people who always prefer direct flights over flights with stops to avoid time wastage.