Third-Degree Price Discrimination in Airline Pricing Paper Example

Third-degree discrimination mostly involves the process of charging different airline fare prices of similar products in a particular segment of the market. There is a high likelihood for a direct link to the clients who are willing to pay for the provided service and goods. This is an indication that prices differ or there is no connection to the cost of production. In most cases, there is the separation of the market with time and geographical position. In this regard, exporting companies are more likely to charge prices that are higher in the markets abroad if the demand estimation will be more inelastic than the prices at the local market (Cowan, 2016).

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Therefore, the establishment of another booking system referred to as the new distribution capability. The new booking system involves using information on the individual personal profile to search for reliable airfare tickets on different price sites before making a booking to a given destination (Chandra & Lederman, 2018). Airlines have opted to offer a higher price to passengers, for instance, in-flight movies and wider seats. In this case, the choice is greatly limited to the economy or the business class. Individual booking seats will, therefore, opt to give their personal details to the prefer airline which may include the marital status travel history, frequent flyer participation age, nationality and the purpose of their trip. In summary, detailed profiling can give airlines a greater scope of involvement in the discrimination of price achieved by providing various fares to different clients for the same journey. If passengers may require special attention to luxuries, therefore, they have to pay the extra amount (Czerny, 2014).

This pricing may definitely be explained by a graph model that will help us elaborate price variation based on the marginal units consumed with intention of leisure or business travels. Therefore, during peak seasons, companies will have MRa=MC while the charge price as Pa. This means that during the off-peak season, companies will probably produce MRb=MC and the charge price represented by Pb. Consumers in this regard who are the passengers, who have an elastic demand will, therefore, be forced to pay higher prices (Pa) unlike the ones having a demand charge that is an elastic (Pb).

The new pricing system will include the fixed charge plus any supplementary variable charges based on consumer units, which may include seat, meals and other special facilities that may be offered to the consumer. More so, discrimination of price may occur in various fixed charges to different market segments and in different charges occurring in units consumed (Borenstein, 2017).

A Graphical Model 1

Therefore, the two pricing policy will apply in setting the tariffs of the consumer as shown in the graph below.

This graph model in this regard will try to explain closely connected product that consumer may be enticed to buy. Consumers are highly attracted to related services which in this case will be in terms of leisure and business that the airline will be producing. In the case of two companies producing similar services, a consumer will opt to check on the quality of the services provided and appropriately compare between the two prices. The company that provides good services at a fair price will at this point have increased output.

A Graphical Model 2

In this scenario, the technique of discriminatory pricing takes the form of ensuring the provision of the core products as a "loosing-leader", which mostly, involves the pricing occurring below the average cost. This is mostly done to convince the consumers to buy the complementary good that could have captured their attention.

A Graphical Model 3

In this case, the airline chooses to be charging low on its main products. In this regard, the airline will accept a lower markup point or the profit cost, this happens as a way of attracting clients to goods and services appearing at a higher markup.

Hypothesis on the Expected Results

The hypothesis under test is that the discrimination of price increase as per the competitiveness in the airline market. Therefore, the use of several carrier tickets on varying routes will lead to an approximate of price discriminations with implicit ticket prices with a margin restriction that the carrier uses to discriminate fare prices.

Research Methodology

The research method to be used in this case will be the analysis two prices for the two competing airlines which will help us understand the price discrimination that may occur. Therefore the final result of this research will be able to tell us the factors that influence the variation of prices. A comparative analysis will be carried out in two airlines.

Data Collection

The data collection in this investigation will use information available on electronic official airline websites. Data include the information about a class of the airline, the fare expenditure for the travel, the time and where the data was obtained from. The principal destination in our study case where we considered when obtaining this data was New York (JFK) to Charleston, SC. The two competitive airways considered were; JetBlue Airways and Delta Airlines.

Table showing price variation for New York - Charleston on Delta Airline

Discussion

From the table shown above, it is evident that discrimination of price occurs because of the increasing competitiveness in the airline market. Therefore, the use of different carrier tickets on different routes will have approximated price discrimination implicit ticket prices restriction where the carrier uses a typical price discriminate. From this research, we can conclude therefore that as the price attributed to the ticket restriction increases the market become competitive.

Conclusion

Generally, we come to a general conclusion that third-degree price discrimination increase with increased completion in airline markets which may encompass some luring factors like leisure and business activities to the consumers. Tickets from various routes have helped to approximate price discrimination of ticket restriction that the carrier uses to price discriminate the summer stay requirements and the advanced purchased discount.

References

Borenstein, S. (2017). The evolution of US airline competition. In Low Cost Carriers (pp. 1-31). Routledge.

Chandra, A., & Lederman, M. (2018). Revisiting the relationship between competition and price discrimination. American Economic Journal: Microeconomics, 10(2), 190-224.

Cowan, S. (2016). Welfareincreasing thirddegree price discrimination. The RAND Journal of Economics, 47(2), 326-340.

Czerny, A. I., & Zhang, A. (2014). Airport congestion pricing when airlines price discriminate. Transportation Research Part B: Methodological, 65, 77-89.

Varian, H. R. (2014). Intermediate microeconomics with calculus: a modern approach. WW Norton & Company.