Price elacity and discremination Essay Example | Topics and Well Written Essays - 1750 words

Price elacity and discremination - Essay Example In a market where travelers faces a highly inelastic demand, it implies for business, travelers are willing part with higher airfare price. Airline firm who can set elevated prices for these travelers can definitely increase their profits and revenue. However, other passengers will be highly sensitive to prices as they may face elastic demand. Therefore, this sort of passages will respond to special price discounts and offers. The airline firms can benefit if they can separate these different sorts of consumers and therefore decrease their consumer surplus. Price discrimination is common to most industries and that the price difference can never be explained by the products` cost differences. It is a common knowledge that the airline industry has ever practiced price discrimination for several years. We all realize that on every flight the passengers do pay different prices, and also that in certain cases we observe that the maximum price is at times five times the lowest price. How do airline businesses practice price discrimination? Still remains unknown to many. The airline market can easily allow price discrimination to prevail. Barriers to entry emerging from scale economies, sunk costs as well as hub-and-spoke systems offer carriers the necessary market power even on fairly competitive routes. Airlines distinguish among themselves through occupying various slots in flight schedules, and also by offering various route networks. For instance, a carrier with a broad number of connections to the West Coast distinguishes itself from another carrier flying only along the East Coast, despite both of them selling tickets for Boston-Miami route. A market of that kind is therefore monopolistically competitive. Moreover, airline passages differ since they have unstable price elasticities of demand. Even though it`s possible to do a resale of airline tickets, it entails high search costs and also it does not get rid of restrictions, for example blackout days or even time-of-day constraints. So as to price discriminate, airline firms require being able to take apart consumer groups having different demand elasticities. The airline firm can do it by attaching different restrictions to cheaper tickets, therefore making them less attractive to airline passages with high valuation of time or even convenience as well as low price elasticity. As a loophole to exercising price discrimination, the time of buying air ticket functions best. There is no fast and hard rule, but if one buys an air ticket many months in advance it appear to be cheaper. For example, for business travelers, the Virgin Blue demands a full charge of $249 one way. For the next- day travel during the peak, it`s possible to get a restricted discount of about $149 and its present advertised best fare is about $59. This forces the question of how far out does one need to book it? And the answer is at least two months. However, if price matters, then Jetstar is definitely the leading c hoice available to consumer as one can travel to Sydney from Avalon next-day flight for just $79 one-way though on restricted discount. A month earlier, one can find a $69 fare, however, you need to book at least six weeks up to two months earlier so as to get $59 special offer. If the demand for a particular flight is far above normal, then the airline firms starts raising the price of that particular flight. It implies that