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Business economics

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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. ...read more.


3, an increase in supply is represented by a shift of the supply curve to the right and increase in demand is represented by a shift of the demand curve to the right. Equilibrium Price in the airlines is achieved when the supply and demand intersect or when they are set to zero. Since demand and supply are equal to each other at equilibrium price, either demand or supply function can be used to determine the market equilibrium quantity. Why is their variation in airline prices? In the airline industry, price discrimination is used by firms to distinguish between relatively price-inelastic business travelers and relatively price-elastic leisure travelers. The third degree price discrimination in airlines is a basis of fare differentiation. This discrimination involves airlines dividing their markets into travel segments, then bundling their services with limitations and selling them to each segment at different fares. Another is that they are ways for firms facing competitive pressures and having high fixed costs to maintain their survival (Baumol and Swanson, 2003). The impact of this price discrimination is that on any given flight there are many travelers paying different fares. By offering a flexible ticket, the airlines allow the customers to reschedule the flight at any time and even cancel the flight without any costs attached to it. ...read more.


As a result, the more competitive routes the more price discrimination can be witnessed. Changing crude oil prices is also a factor for differentiation of airline fares. Reference: Borenstein, Severin and Nancy L. Rose (1994), "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy 102 (August), 653-683. Earl, P.E. and Wakeley, T. (2005) Business Economics: A Contemporary Approach, McGraw-Hill. Gale, Ian L. 1993. "Price Dispersion in a Market with Advance-Purchases", Review of Industrial Organization, vol. 8 (August), pp. 451-64. Hazledine T, Oligopoly and Price Discrimination: theory and application to airline pricing Holmes, Thomas J. 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly", American Economic Review, vol. 79 (March), pp. 244-50. Obeng, K. "Airline daily fare differentiation in a medium-size travel market", Journal of Air Transport Management, Volume 14, Issue 4, July 2008, Pages 168-174 McAfee, R. P, and Velde V.Te, "Dynamic Pricing in the Airline Industry" California Institute of Technology. Mehta, L.P, Managerial Economics, Sultan Chand and Son's Publications Stavins, J. (2001): 'Price Discrimination in the Airline Markets: The Effect of Market Concentration', Review of Economics and Statistics, 83: 200-202. Varian, H. (1989): 'Price Discrimination', Chapter 10 in R. Schmalensee and R. D. Willig (eds.): Handbook of Industrial Organization, North-Holland. Vasigh B, Tacker T and Fleming K, Introduction to air transport economics: from theory to applications ?? ?? ?? ?? 1 ...read more.

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