Micro Economics

Introduction

We all know that price discrimination is practiced in many industries all over the world. Price discrimination is the practice of firms charging different prices from different consumers, and that the price difference cannot be explained by cost differences alone (Steen & Sorgard, 2001).

It is the nature of the industry that makes it very vulnerable to price setting and altering. The airline industry had very high fixed costs and very low variable costs which means to maximize profit the airlines would want to fill every seat possible at whatever price possible since costs of having an extra passenger onboard is very low.

It has high fixed costs

and low marginal costs making the cost of having an extra passenger onboard negligible.

Airlines want to fill every seat on the aircraft to maximize profit. This requirement to sell

every ticket means the airlines have to use the most efficient pricing strategy. Given that

flights have a variable demand and that passengers are heterogeneous in their demand

certainty it is possible to differentiate the consumer base. It is this market segmentation of

customers that aids price discrimination and explains why airlines can sell tickets for a cheap

“no frills” service.

In recent years there have been many political, social and economic changes that have

resulted in the emergence of low cost airlines. This coupled with a rapid expansion in the use

of the internet for comparison shopping has significantly increased price transparency. The

major focus of this study is on how the web and the increase of the internet as a ‘frictionfree’

marketplace have affected airline pricing strategies.

This study highlights sources of price discrimination that provide a basis for interpreting

pricing profiles that the airlines currently use. Each individual source of discrimination can

be evaluated in terms of effect on the price. A comparison between this existing pricing

profile and a historical profile...