Question

The airline’s use of demand pricing results in passengers paying different prices for essentially the same seat. What is the benefit of this practice to the airline and to the passengers? What is the drawback to the airline

and the passengers? Do you think this practice should be continued? If not, what would be the best alternative?

Answer 1

The use of demand pricing has both benefits and costs. Airline is able to generate more profit using demand pricing because those who have higher demand are able to pay a higher price also because of increased willingness to pay. This is it true for business travelers who do not plan to book tickets in advance and therefore are willing to travel in emergencies.

For vacationers who plan in advance, the willingness to pay is quite low and therefore they book tickets quite early. This is a kind of price discrimination practice where different consumer types are charged different prices. To the passengers also this practice is beneficial because they are able to get seats according to their willingness to pay. However, the drawback of this policy is the increase the price for those passengers who travel unexpectedly and are not willing to pay high prices.

An alternative approach can be used where some seats are reserved for or consumers with lower income so that reservation on economic grounds is given to them. This will also increase the profit for the airliners.