Price discrimination is pricing the same commodity differently for various groups of consumers. A business may define multiple rates based on a variety of factors: Period of use (higher price at peak times), when a unit is purchased (discounts for buying early), the profile of age, and the quantity purchased (lower unit price when the higher amount is bought). The basic premise behind price discrimination is that the business is aiming to benefit from different price elasticity of demand. People who are willing to spend more on items and services have very inelastic demand. If prices are increased for these clients, the company’s profit and earnings may increase. Other clients will respond to special offers and price reductions since they are more cost-conscious. It will gain if the business can segregate these consumers and lessen their surplus values.
How an Airline practice price discrimination
There are a number of ways through which an airline can exercise price discrimination: First, the time of purchasing a ticket. Although there is no strict guideline, purchasing a ticket many months ahead usually results in a lower price. The airline will increase the price of a particular flight if there is high demand for it. It means that only those who are willing to pay more will buy the additional seats (Azzolina, Razza, Sartiano, & Weitschek, 2021). The airline will alter the route and lower the rate if a certain aircraft is not operating effectively. The flight will be completely booked as a consequence of the greater number of price-conscious clients attracted by the lower price. Second, off-peak hours are less expensive. These flights are always less expensive because certain flight periods are less frequent. For instance, suppose you go away for the weekend. In contrast to early Sunday flights, most individuals would want to return late on Sunday, and most of these late-night flights are always more expensive. Thirdly, times of traveling (Friesen, 2020). Traveling when the season is at its peak will be much more expensive.
Similarly, airfares change depending on the time of the year. When the summer vacation season is in full gear, airlines impose higher fares. Due to the fact that they cannot take holidays during the academic season, parents’ request is more flexible. Thirdly, an airline practice price discrimination by charging extra. Some airlines have become experts at charging for add-ons such as check-in bags.
Does price discrimination increase revenue for airlines?
Yes, it does raise revenue. An extra traveler has a reasonable marginal cost. The majority of the expenses related to flying are fixed expenses. All these fixed flying costs must be paid even if there is just one passenger. Consequently, the airline will attempt to sell every ticket to maximizing income (Kutlu & Sickles, 2017). Most airlines have made extremely priced ticketing system investments to control supply and demand and ensure they take advantage of the consumer surplus. Price discrimination also allows the airline to promote low-cost, primary tickets, but when you include all the extras together, you wind up paying much more (Knorr, 2019). However, suppose we may consider spending an additional £500 on a business ticket. In that case, we could remain in the economy and pay the small £30 premium for the seat with more legroom.
In conclusion, price discrimination has negative consequences, including a loss in consumer surplus, which happens when the airlines charge higher prices. Airlines reap big when they make supernormal revenues, but inelastic consumers lose out. Additionally, price discrimination is hypothetically biased. Price-inelastic consumers, like business-class travelers, may not all have high incomes. This is also unjust and unequal if they are assessed at a more excellent price. However, most businesses would cover the cost of the tickets rather than the actual customer.
Azzolina, S. 1., Razza, M. 2., Sartiano, K. 3., & Weitschek, E. 4. (2021). Price Discrimination in the Online Airline Market: An Empirical Study. Journal of Theoretical and Applied Electronic Commerce Research; 2282. Retrieved from https://www.proquest.com/scholarly-journals/price-discrimination-online-airline-market/docview/2727618673/se-2
Friesen, M. (2020). A dynamic perspective on consumers’ price fairness perception: Empirical evidence from the airline industry. Unternehmung: Swiss Journal of Business Research and Practice; pp. 403–425. Retrieved from https://www.proquest.com/scholarly-journals/dynamic-perspective-on-consumers-price-fairness/docview/2474400259/se-2?accountid=151051
Knorr, A. 1. (2019). Big Data, Customer Relationship and Revenue Management in the Airline Industry: What Future Role for Frequent Flyer Programs? Review of Integrative Business and Economics Research; 38–51. Retrieved from https://www.proquest.com/scholarly-journals/big-data-customer-relationship-revenue-management/docview/2095699763/se-2?accountid=151051
Kutlu, L. 1., & Sickles, R. C. (2017). Measuring market power when firms price discriminates. Empirical Economics; 287–305. Retrieved from https://www.proquest.com/scholarly-journals/measuring-market-power-when-firms-price/docview/1919222806/se-2