Question

Why do airlines charge much more for tickets purchasing at the last minute while broadway theaters follow the opposite practice?

Answer 1

In both cases, firms face downward-sloping demand curves and thus stand to gain if they can segregate users with high reservation prices from those with low reservation prices. But why would last-minute purchases be associated with lower reservation prices in the case of theater tickets, but with high reservation prices in the case of airline tickets? The answer, according to Mr. Efthimiatos, stems in part from how a buyer’s reservation price case is linked to her opportunity cost of time. By waiting until the last minute to buy a theater ticket, someone whose opportunity cost of time is high would risk wasting a valuable evening if a seat turned out to be unavailable, hence her willingness to pay a premium for an advance ticket. Although she might also be willing to pay a premium to avoid missing a flight, an offsetting factor seems even more important, which is that those travelers whose opportunity costs of time are highest business travelers, for the most part, tend also to be those who most often need to rearrange their travel schedules to accommodate last-minute contingencies. By making discounts available only to those who are willing to commit to a specific travel schedule well in advance, airlines are thus able to charge higher fares to those business travelers. Most remaining business travelers are made ineligible for discounts by what for them proves an extremely effective hurdle namely, the Saturday night stay-over requirement. Since most vacation trips involve at least a weekend, this hurdle is easily cleared by vacation travelers. But having been away from their families during the week, few business travelers are willing to extend their stay for the weekend just to receive a discount.