Introduction
The nature of operations at Southwest Airlines limits its abilities to increase profits through other means thus prioritizing price discrimination. The primary value paid for by Southwest customers is transport from one point to the next. Southwest uses pricing as a source of competitive advantage and does not have classes in its Boeing 737 flights (Borenstein, 2017). The only viable options are to make some customers pay a higher price for the same product thus harnessing price discrimination to increase profits.
Price Discrimination Strategies
Price discrimination strategies in Southwest can be attained by making customers believe that they are getting an undue advantage over other customers, hence they need to pay extra for the same. The first strategy involves seating arrangements akin to the modern EarlyBird boarding option. Southwest can map out the 30 top seats that EarlyBird customers prefer and make them premium seats hence giving them a premium price. A 20% increase can be added to the 30 seats. The strategy increases total revenue without any additional marginal cost hence the total cost will be constant (Tisdell, 2015).
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The second strategy involves the introduction of premium flight. Southwest has over four thousand flights per day to different destinations and can be able to pick out up to a thousand extremely popular flight. For example, there are times when a particular flight is more popular than other times, perhaps in the early mornings, late evenings or when flying against time across timelines. Southwest can increase the fares in these one thousand carefully selected flights. A small token like a special meal can be introduced in the flights to mask price increase such as a boarding gift. Marginal costs will be negligible but total revenue will increase (Tisdell, 2015).
Another price discrimination strategy appropriate for Southwest would be the introduction of an assured flight option. For short flights, A Boeing 737 seats about 200 people and on average over 100 people have a 100% chance of being on the flight even when it is overbooked. Southwest can introduce an assured flight option where as long as the flight will take off, the passengers will be in the flight without fail. South West will thus make money without selling anything apart from what it is supposed to provide its customers (Tisdell, 2015).
Profit Maximization
All the strategies outlined above adhere to the concept of profit maximization as they leave increase pricing while keeping the input and output constant. Profit maximization as a concept entails the manipulation of the tripartite factors of input, output, and pricing to get the best possible profits (Board & Skrzypacz, 2016). A combination of profit maximization and price discrimination, therefore, entails getting a higher price without changing the value of the product or the cost of producing it. This approach is meticulously followed in all the proposed strategies.
Price Discrimination and Monopoly
A marketer does not need to have an actual monopoly to be able to employ the price discrimination strategy. However, when a marketer applies price discrimination without a monopoly, there is a risk that it might result in losing customers to the competition. For example, the application of price discrimination in a competitive environment can be done in a way that it does not alienate the customers thus pushing them to the competition. Conversely, price discrimination can also be applied by a company that has a competitive advantage that is so solid that it provides tangible cushioning from loss of customers (Chandra & Lederman, 2015).
Conclusion
Southwest’s primary source of revenue is the sale of tickets to passengers for its thousands of daily flights across the USA. The revenue stream produces a variety of price discrimination avenues where Southwest can sell the same product at higher prices. Total revenue will increase out of the higher prices but since no product upgrade is necessary, there will be not increased marginal cost for the product with higher prices thus the total cost remains constant. The approach thus falls within the concept of profit maximization. Southwest enjoys a massive competitive advantage based on low-pricing hence it can employ price discrimination even if it does not have a monopoly.
References
Board, S., & Skrzypacz, A. (2016). Revenue management with forward-looking buyers. Journal of Political Economy , 124 (4), 1046-1087
Borenstein, S. (2017). The evolution of US airline competition. In Low Cost Carriers (pp. 1-31). New York: Routledge
Chandra, A., & Lederman, M. (2015). Revisiting the relationship between competition and price discrimination in the airline industry. Rotman School of Management Working Paper , (2477719)
Tisdell, C. A. (2015). The theory of price uncertainty, production, and profit . Princeton, New Jersey: Princeton University Press
