11/01/2012

Does price discrimination keep the airline industry alive?

Price discrimination happens when a seller is able to charge different prices to different consumer segments for an identical good. With that said, are airlines the kings of price discrimination? I personally believe that they are. If airlines weren't able to price discriminate, they would go out of business. This is due to the fact that the majority of an airline's profits are derived from first class and business passengers. These passengers have historically been known to pay far more than other passengers. The average vacation traveler however, adds very little to an airline's bottom line through ticket sales. So is price discrimination the only sustainable pricing solution that airlines have? In my opinion, a single rate pricing model would be disastrous for the airline industry. If this were to happen, the ultimate loser would be the leisure/vacation traveler. This is due to the fact that their costs would have to rise significantly to offset the lost profits from first class and business travelers.

4 comments:

Moh A said...

While the first and business classes customers do account for the majority of the airline's profits, I'm not sure this is an example of airlines price discrimination. As stated at the start of the article, price discrimination is charging different prices to different segments of the market for identical services and products. The passengers in first class are getting a differentiated product from coach passengers through various comforts and amenities. Perhaps a better example of airline price discrimination is the price variation based on availability of seats, time of purchase, coupons (frequent flier miles).

Dave Tufte said...

Michael: 100/100
Moh A: 47/50 for a possessive error.

I think both the post and comment are correct. Yes, the airlines are price discriminating. But, yes, they are also offering bundled products: first class, business class and coach tickets. By doing so, they are able to get their customers to self-select into desirable groups. This is indirect segment discrimination.

Aiden said...

I also agree with both the post and comment. Airlines are in fact utilizing price discrimination for a wide array of situations that include seating preferences, early boarding, emergency aisle seats, etc. In this case there is a price difference for ultimately the same product. I do not however believe that this is the case for business/first class. These customers are receiving a different product through different amenities that the coach passenger would never receive.
Secondly, I believe there is an example of a company that has survived and is actually thriving by doing away with as much of this price discrimination as possible. They do not have business/first class, do not have assigned seats to pay more for, or, I believe, charge extra for early seating, emergency rows or other benefits. I believe that Southwest Airlines in an actual proof that sometimes when you try to charge your way to success or the top, you may actually be burying yourself.

Dave Tufte said...

Aiden: 50/50.

I disagree. I think you are right that business/first class is a different product from coach. But, I think airlines just discriminate in the different markets, rather than saying they don't discriminate in the one.

I think the airlines price discriminate because they have to. Historically, transport firms are just not consistently profitable. What Southwest has done is save on their costs, particularly maintenance. I don't see either one as better; both are just approaches to getting any profit at all.