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You Paid How Much for That Seat

In: Business and Management

Submitted By harrira
Words 367
Pages 2
Airlines charge different prices to different group of consumers for the same or similar product (price discrimination). Airline companies can segment customers with different price sensitivity- have different demand curves Tickets are offered at a different price depending on when you purchase it, at what time of the day, day of the week, services you purchase and cannot be resold. By offering different fares airlines are creating consumer groups who in turn will self select based on their elasticity of demand. This is an example of second degree price discrimination. The consumers pay different prices for different amount of quality of the good purchased. 

Having market power, airline companies charge higher price to business travelers who are willing to pay more. Business travelers usually do not purchase in advance they do not select their travel dates and time they travel. Their ticket is not bound by restrictions (time, day of the week etc.) they do not chose when to fly and the cost is covered by their company.
The other segment of customers are more price elastic and unwilling to pay higher prices. However, their ticket comes with restrictions attached to it.
A firm is setting the price of its products given the market conditions and its desire to maximize profit. Since it sells the same product to different segments its marginal cost is the same for both groups.
Most of the cost for a flight are fixed cost and are well known in advance. As the variable cost (food, service) are very low. Other major cost item is space (business class seats use three times the area of standard economy seats). So it takes a very little increase in cost of “production” to serve first/business/ economy premium class passengers, thus the price difference charged to customers cannot be explained by cost differences (higher for Euro 2,000 on average )
To maximize its…...

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