School of Economics

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SID Number:460385020
Family name:

Huang

Other Names:
Email:

Edwin.huang7@gmail.com

Unit code: Econ 1001__________ Unit name: _Introductory

microeconomics_________________________________________________
Lecturer/Tutors name: Stephan Whelan/___________________ Lecture/Tutorial
day/time: Friday /4pm___________________
Full assessment title: The impact of Price discrimination on the aviation
industry_____________________________________________________________
Word limit of assessment:750_________________ Word
count:748_______________________________
Due date:31______/_05_______/2016_______
31/05/2016______ _____/_____/______

Time & date submitted:__10pm

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The following essay explores the various forms of price discrimination a

firm uses. This is linked back to the article case study to draw parallels
between them. The essay explains why firms conduct price
discrimination and analyse the implications of such behaviour. However a
firm must also consider the ethical and privacy concerns of consumers
which are affected by these strategies. The essay delves into elasticity
frequently as it has a strong relationships with the strategies involving
price discrimination.

The impact of price discrimination on the aviation industry

The strategic nature of modern-day airlines is intertwined with the
demands of their current and potential customers. The Keynesian acts as
a pillar for this notion as firms are continually adapting their behaviour
to precisely meet the demands of its customers. In particular airlines
have adopted strategies which resemble the final economic outcome to
those described in the article the price you pay for is becoming
personal. These modern strategies have various implications for both
airlines and consumers will be explored in depth in the following
analysis.
Airlines use ticket restrictions such as advanced purchase discounts
which act as proxy of price discrimination (Stavins, 2006, p. 202).
Airlines use first-degree price discrimination by making tickets more
expensive as the date of departure nears which discriminates against
those who have a relatively lower willingness to pay or high elasticity.
Hence according to Nguyen and Wait (2016), airlines can often charge
each consumer their exact willingness to pay. For example as the takeoff date nears, the price of tickets increases, intended to appeal to
consumers with a relatively high willingness to pay.
This effectively allows airlines to charge a higher price for the same
marginal cost. As pointed out in Nguyen and Wait (2016) there will be a
movement along the demand curve itself which will lead to an increase
in revenue. Hence Firms are able to maximize profits, taking advantage
of those more willing to pay. Consumers also benefit in the sense that
those who are more willing to pay are able to secure a ticket if a
shortage were to occur.

Saturday night stayover requirements are another form of ticket

restriction which involve marginal implicit costs. This discriminates
against business travelers by attempting to charge the highest possible
price. As the airline assumes business travelers would prefer to not stay
over on a Saturday night and know they are less price-sensitive than
leisure travelers, airlines add a Saturday night stayover requirement to
lure these customers assume into paying the higher fare which does not
have this requirement.
This following diagram shows that an increase in price will lead to a less
of a decrease in quantity demanded. Hence the airline is able to increase
revenue with equal marginal costs as these customers are relatively
inelastic.

According to Goodwin (1992) Overall there is a reasonably clear pattern

for long term elasticities to be between 50 percent higher and 3 times
higher than the short term suggesting that the strategies firms use
mostly work to attract customers in the short term but have limited
impact on the long term. This also implies that customers are willing to
switch airlines over the long run and thus explains why firms are
continuously trying to innovate through personalized pricing to gain the
competitive advantage over its rivals. This is demonstrated in the
following hypothetical situation.

As it can be seen both firms have a dominant strategy to innovate and

those who do not innovate will be worse off.

Customers are increasingly being exposed to personalized pricing as firms

start to realize the potential benefits of incorporating such strategies. As
addressed by (Shypanya, 2014) Theres something a little unsettling
about the amount and type of information that can be captured about

you online, consumers are apprehensive about the shift from equal
pricing to personalized pricing. Additionally (Freed, 2015), mentions A
survey by Unisys found only 27% of Australians are comfortable with
being identified as targets for offers via social media. Hence these
strategies involving price discrimination are done in moderation and done
in a sensible way without violating a customers trust or privacy. Hence
several measures such as disclosures are being used to inform customers
of the firms behavior. However ultimately as the market moves towards
personalized pricing, airlines would undoubtedly follow in order to adapt
to the changing business environment and to survive. As firms are
constantly seeking to maximize profits, those who choose not to seek
new ways of generating revenue are likely to be left behind.
Many of the strategies airlines use resemble those mentioned in the
aforementioned article. Each one has its own unique implications for both
the consumer and the airline. As the prevalence of strategies of this
nature continues to increase, airlines need to consider the perspectives of
the consumer and their concerns with such business behavior to the point
where perhaps an airline may need to limit the use of such strategies.
Thus the movement towards personalized pricing is having an
exponential impact on the aviation industry.

References
Nguyen, B. and Wait, A. 2016, Essentials of microeconomics, Routledge, Sydney
Stavins, J. 2007, Price discrimination in the airline market: the effect of market
concentration,
Massachusetts Institute of Technology ,
Viewed 29 May 2016,
http://www.mitpressjournals.org/doi/pdf/10.1162/rest.2001.83.1.200

Goodwin,P.B. 1992, A review of New demand elasticities with special reference

to short and long run effects of price changes,
The London School of Economics, viewed 26 May 2016,
http://www.jstor.org/stable/20052977?seq=2#page_scan_tab_contents
Freed. 2015, The price you pay for an airline ticket becoming personal
Financial review,
28 May 2016,
Shpanya, A. 2014, What is price discrimination and is it ethical?, Econsultancy),
6 January, viewed
28 May 2016,