Identifying Individual Preferences in the Airline Industry

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ECF3121 Consumer Economics

Identifying Individual Preferences in Airline Industry

Transportation services are becoming more common and broadly used in recent decade, in line with the advancement of technology. Generally, transportation services can be divided into three groups: water transportation, land transportation and air transportation (Gee, Choy, & Makens, 1984). Airline industry, which this essay focusing on, is one of the discoveries of newest innovations in the travel services sector. It has been developed so much in recent year to operate more effectively. Not only guarantee a safe journey to the destination place, the airline companies are now trying to create a competition in the market by providing the best services to the travellers and offering competitive prices (Hensher & Louviere, 1983). Those strategies are aimed to attract more consumers to travel by their airline companies.

This essay will discuss the theories of consumer economics and their applications in the real consumer issues in airline industry, mainly on the factors that changing the consumer demand of airplane ticket, as well as the underlying reasons of why consumers prefer some particular airlines to the others. Furthermore, the behaviour of different types of consumers toward the choice of different airlines will also be discussed here. In observing those issues, this paper will focus on two airline companies: Singapore Airlines and Jetstar. The price data were obtained from a single route from Melbourne to Singapore.

The core idea in analysing consumer behaviour in making choices in the economic activity, mainly in the airline industry, is because of their limited incomes and unlimited wants. Those then lead to trade-offs and opportunity costs.

Consumers in the airline industry could be divided into two groups, which are business and pleasure travellers.

Elasticity is the percentage change in one variable resulting from a 1-percent increase in another (Pindyck & Rubinfeld, 2009). When the price elasticity is greater than 1 in magnitude, we say that demand is price elastic because the percentage decline in quantity demanded is greater than the percentage increase in price. If the price is less than 1 in magnitude, the demand is said to be price inelastic.

Graph 1. Elastic and inelastic demand


                     (Inelastic demand)                                            (Elastic demand)

In this case, elastic demand of airline industry is exceptionally unstable because it depends on the market conditions such as inflation, terrorists attack and price oil.  In airline industry, price elasticity demand is considered both elastic and inelastic (Yahoo Voices, 2008). An elastic demand is in relation travel for pleasure. Pleasure travellers are extremely sensitive to the price of the travel. An inelastic demand is in relation for business travel. Business travels have little effect for increase in price of the travel.

Income elasticity of demand measures the degree of responsiveness of demand of a good to a change in consumers’ income. It has equation  of : EI=[ΔQ/Q]/[ ΔI/I]=[I/Q]*[ ΔQ/ ΔI]. Airplane ticket is normal good as it has a positive income elasticity, which means when consumers’ income increase the consumption of ticket will increase as well.

Cross elasticity of demand measures the degree of responsiveness of demand of one good to a change in the price of another good. It is shown in the equation: EQ1P2 = [ΔQ1/Q1] / [ΔP2/P2] = [P2/Q2]*[ΔQ1/ ΔP2]. If airplane ticket and other consumption (i.e. food and cloths) are considered as a group, there will be a positive cross-price elasticity, which tells us that if the price of one good (other consumption or ticket) goes up, the demand for the other good goes up as well.

Consumer behaviour analysis attempts to understand the consumers’ allocation of incomes among different goods and services to maximize their well-being. It consist of three distinct aspects: consumer preferences, describing the reasons why people might prefer one good to another; budget constraints, reflecting consumers’ limited incomes that restrict the quantities of goods they can buy; and consumer choices, which are the combination of the consumer preferences and budgets constraints (Pindyck & Rubinfeld, 2009).

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There are some basic assumptions made in observing consumer preferences in the airline industry. First, preferences are assumed to be complete. Complete means that consumers are able to compare and rank all possible market baskets. However, this assumption ignores costs. Second, preferences are transitive or consistent. And third, “more is better than less” since goods are assumed to be desirable.

Indifference curve represents all combinations of market baskets which provide consumer with same level of satisfaction (Pindyck & Rubinfeld, 2009). Indifference curve and utility functions (set of indifference curves) are used to analyse the consumer behaviour and preferences in choosing ...

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