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Analysis of Airlines Pricing Strategy Assignment

   

Added on  2020-02-18

10 Pages2536 Words123 Views
Running head: PRICE AND MARKETPrice and Market: Analysis of Airlines Pricing StrategyName of the Student:Name of the University:Author note:
Analysis of Airlines Pricing Strategy Assignment_1
1PRICE AND MARKETIntroduction Airlines have always practiced charging different prices from different customers. In thehuge world of aviation history, this phenomenon of different prices exists for every airline, smallor big. The airlines charge different prices for the tickets based on flying class, extra servicessuch as meal cost, luggage cost, time of ticket sales, time of flying, season, privilege membershipetc. This is termed as price discrimination in economics. The practice of selling the same productor service at different prices to different consumers for maximizing revenue and profit is knownas price discrimination (Baumol and Blinder 2015). The sellers act as a monopolist oroligopolists and determine the price through price discrimination. In the airlines industry, theprice of the tickets fluctuates over the period of sales. It rises rapidly when the departure dateapproaches. It is a very important phenomenon because an individual pays a price for the seat,which might be significantly different from the person sitting next to him. This practice helps theairlines to maximize profits multiple times than what they would have made otherwise. Thisphenomenon is also known as price differentiation or intertemporal price discrimination. Thisoccurs when heterogeneous customers take entry into the market at different point of time, thiscreates incentives and opportunities for the airlines to discriminate the price and maximizeprofits (Moulin 2014). The following report focuses on economic analysis of the pricing strategyby the airlines. Price discriminationVarious aspects of the exchange processPrice discrimination is a very common practice in the business world. Firms apply thispractice to get different prices from different customers. This is a pricing strategy that enables
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2PRICE AND MARKETthe firms to charge differentiated prices for the same good or service. Under pure pricedifferentiation, the firms charge the maximum price to each consumer, which he is willing topay. In the common practice, it is seen that firms make segmentations of the consumers based ondifferent attributes and make separate target groups and charge different prices to differentcustomer groups (Varian 2014). When the profit from separate markets is greater than the profitfrom the combined market, the firms go for price discrimination. The relative demand elasticitiesof the markets determine the level of price discrimination. In a relatively inelastic market, theprice is charged at a higher rate and in the relatively elastic market, price is charged at a lowerrate (Baumol and Blinder 2015). Figure 1: Price Discrimination(Source: Varian 2014)There are three types of price discrimination, namely, first degree, second degree andthird degree. First degree discrimination arises when a firm charges the maximum price for eachunit that a consumer is willing to pay. This process captures the entire consumer surplus for the
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