Introduction

There are a number of reasons why airline industries charge different prices for the same good. Perhaps the most evident reason is to exploit customer heterogeneity in reservation prices. “Price discrimination is as common in the market place as it is rare in economics textbooks” Louis Phlips. In this statement of Louis it’s certainly true that price discrimination- being the charging of different prices to various customers for similar product with the price differential not being justified fully by any difference in the costs of supplying the customers- is almost persistent. Price discrimination can take various forms.

According to Varian (1989), we have the following definitions:

  • First degree: The seller charges a different price for each unit, so that the price of each unit equals maximum willingness to pay.
  • Second degree: Each consumer faces the same price schedule, but the schedule involves different prices for different amounts of the good purchased.
  • Third degree: Different consumers are charged different prices, but each consumer pays a constant price for each unit of the good bought.

Market Demand: Demand is the capability and willingness to buy specific quantities of a good or service, at different prices in a given time period. Demand function is the most important aspect for all business that exists, as sales is the reason for their existence.

In the airline industry the demand is assessed in terms of the number of passengers, revenue passenger miles. In airlines an increase in price results in decrease of demand.

Determinants of Demand:

  • Prices of Substitutes ( Such as Travel by rail or car or bus )
  • Prices of Compliments ( Hotels or rental cars )
  • Seasonal factors ( for example, demand for air travel during the holidays)
  • Terrorism or Natural disasters
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Any change in these determinants that make consumers willing to fly more for a given price will trigger an increase in demand.

Market Supply – The supply for any good is based on the production cost. Supply in airlines refers to, airlines capability to provide a specific number of seats at different price in a given period of time. In air transportation supply is expressed in terms of available seat miles. Airline industry supply more seats with the increase in ticket prices.

Determinants of Supply:

  • price of the good or the service
  • Prices of Resources (aircraft, fuel, maintenance, labor, landing ...

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