Have you ever tried buying airline tickets with your family or friends? Most of the time the prices for these tickets are changing. Prices might increase when your try to book a weekend flight or if you add check-in luggage. The constant changing of airline tickets is no coincidence. There is a perfectly understandable explanation for this. Read on to find out what it is!
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Jetzt kostenlos anmeldenHave you ever tried buying airline tickets with your family or friends? Most of the time the prices for these tickets are changing. Prices might increase when your try to book a weekend flight or if you add check-in luggage. The constant changing of airline tickets is no coincidence. There is a perfectly understandable explanation for this. Read on to find out what it is!
To understand the price changes for airline tickets, we need to understand what price discrimination means.
As hinted by the term, price discrimination relates to when the same or similar goods/services are sold at different prices.
There are three types of price discrimination:
First-degree price discrimination is also known as the purest form of price discrimination or perfect price discrimination. This is when a seller charges consumers the maximum possible price they are willing to pay.
As Figure 1 illustrates, the producers get all the total surplus. In this case, there is no consumer surplus.
Second-degree price discrimination occurs when a seller charges a different price for different quantities consumed. Examples of this are loyalty cards rewards or discounts for consumers, so that they can purchase more.
As figure 2 illustrates, firms initially put the price of a particular good or service at P1. The discounted price is P2. Consumers benefit from the lower price and that increases their consumer surplus and firms also benefit from the extra revenue.
Third-degree price discrimination occurs when a seller charges a different price to different customer groups. A classic example is some cinemas that often have different prices for children, students, adults, and the elderly.
Figure 3 illustrates third-degree price discrimination. The whole market is split into two categories: elastic and inelastic consumers. Firms charge elastic consumers the lowest price. For example, cinemas charge students a lower price since they have less disposable income and are more sensitive to price changes. Inelastic consumers are charged the highest price. In our cinema example, adults tend to be charged the highest price as they have more disposable income and are less sensitive to price changes compared to other groups.
Airlines use a combination of price discrimination and dynamic pricing in the pricing strategy for airline tickets. In the airline industry, airlines practice price discrimination in a number of ways:
In the airline industry, customers are usually grouped into two customer groups: leisure and business. This demonstrates that the airline industry tends to practice third-degree price discrimination.
Grouping is done this way due to the distinct behaviours between the two groups. Customers who are travelling for the purpose of leisure are more likely to be sensitive to price and so would tend to book in advance to get cheaper tickets. Leisure travellers take advantage of 'advanced purchase' discounts, as the prices of tickets gradually get more expensive as the day of departure approaches. This is also because leisure travellers would have more elastic demand due to their sensitivity to price.
People who travel for business purposes, however, need more flexibility in comparison to those who travel for leisure and so would book only a few days in advance. Airlines would take advantage of their more inelastic demand and charge at higher prices.
A demand-based pricing strategy that solely relies on grouping passengers as either ‘leisure or business travellers’ is not the most effective discrimination as it does not accurately capture the consumer landscape.
That is why airlines today use what is known as a dynamic pricing strategy. This strategy takes into account real-time data on consumer buying patterns.
Dynamic pricing is a technique of pricing a product according to current market conditions.
With the use of dynamic pricing, the prices of tickets change in real-time based on the market data. This involves things such as customer behaviour, competitor prices, and popular events such as music festivals (like Coachella). Other factors like fuel prices, ground handling, and the cost of carrying an additional traveller are also filtered into the prices of tickets.
One real-life example of price discrimination in the airline industry is Southwest Airlines.
A randomly chosen one way trip from Philadelphia, PA (PHL) to Los Angeles, CA (LAX) on Tuesday, January 18 (a weekday) would cost between $366 - $456 US dollars. However, on Saturday, January 22 (a weekend) the same trip would cost between $127 - $217.
Weekdays tickets tend to be more expensive for this specific route, as it is a common assumption that customers who buy a weekday ticket are travelling for business purposes. They have inelastic demand as they must be in Los Angeles for work. They have no other option, so they are more willing to pay a higher price.
On the other hand, weekend tickets are usually cheaper because people who travel during the weekend do so for leisure. If prices are too high they would opt for cheaper alternatives. Therefore, they have elastic demand so airlines charge them lower prices.
It is also relevant to note that similar to other airlines, Southwest charges different prices at different times of the day: early morning and late-night flights are less expensive due to less demand.
The engagement of the airline market in price discrimination has both positive and negative effects on all economic agents: consumers, firms, governments, and third parties.
Some of the positive effects of price discrimination are:
Some of the negative effects of price discrimination are:
Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get consumers to agree to.
Airlines do this in order to maximise their profits.
Price discrimination is generally not harmful to the economy. However, it can be harmful to the economy when it leads to misdistribution of resources to the point that output and profits are not maximised.
Third-degree price discrimination is when a seller charges a different price to different customer groups. This is done between business and leisure travellers in the airline industry.
What is price discrimination?
Price discrimination is a selling strategy that charges customers different prices for the same product or service, based on what the seller thinks they can get consumer to agree to.
What are the types of price discrimination?
The three types of price discrimination are: first-degree price discrimination, second-degree price discrimination and third-degree price discrimination.
What is first-degree price discrimination?
First degree discrimination is also referred to as the purest form of price discrimination or perfect price discrimination, as the seller would try to charge the consumer at the maximum possible price for each unit consumed.
What is second-degree price discrimination?
Second-degree price discrimination is the one which occurs when a company charges a different price for different quantities consumed, such as discounts given for more purchases.
What is third-degree price discrimination?
Third-degree price discrimination on the other hand occurs when a seller charges a different price to different customer groups. a classic example is a cinema which often has different prices for children, students, adults and the elderly.
What type of pricing strategy do airlines adopt for their tickets?
Airlines use a combination of price discrimination and dynamic pricing in the pricing strategy for airline tickets.
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