Question

1. Airlines are doing better right now because of lower fuel prices, but it is still a highly competitive industry with narrow margins and low profit per passenger.   Some airlines have extra charges of up to $50 for checked bags, some are charging for meals, and one has considered charging for access to bathrooms. One airline announced a plan to charge by the pound. Is this reasonable? Is it price discrimination?

For those that do not understand how aircraft work I offer the following. The more weight on the plane, the more energy (fuel) it takes to lift it. Also, the amount of weight a plane can lift includes the weight of fuel, so the more weight in the plane (bags and people) the less fuel the plane can take on. Aircraft full of heavy people and heavy bags need more fuel to get the energy, but may not be able to put on the amount of fuel they need because it weighs too much (six pounds a gallon). This limits the range (how far the plane can fly).

Is it price discrimination or just plain discrimination to charge very large people for a second seat? One airline announced a plan to do so. If they do, should we just let them charge by the pound? Let’s say you and your bags get on a scale and get charged $1.00 per pound per 1,000 miles. Would that be fair?

NOTE: Remember, I am asking you a normative question here but you need to back up with some positive analysis and not just an emotional response. Part of the point of these types of questions is to think about who gets to dictate what the definition of fair is?

2. A classic example of monopolistic competition is the restaurant industry. In what ways does this industry show the characteristics of the monopolistic competition market?

3. George says, "If the amount of product differentiation in a monopolistically competitive industry is very small, the outcome in that market will not be very different than if it were a perfectly competitive industry." Explain if he is correct and how you would respond to his reasoning.

Answer 1

1. Airlines are doing better right now because of lower fuel prices, but it is still a highly competitive industry with narrow margins and low profit per passenger.   Some airlines have extra charges of up to $50 for checked bags, some are charging for meals, and one has considered charging for access to bathrooms. One airline announced a plan to charge by the pound. Is this reasonable? Is it price discrimination?

Price discrimination is a practice of charging different price for the same product to different customers. It is possible only when costs of production are different.

In case of airlines this is not a price discrimination but a plain discrimination as costs of production are different in this case. Airlines can discriminate as this is a way they find to generate additional revenue based on user inputs (additional luggage, weight etc)

In my opinion, charging for bathrooms will not be fair if it is a normal usage. Additional bathroom usage can be charged.