The airline sector is prone to the third degree Price discrimination, which is a strategy that describes a situation where the sellers charge the same products and services differently. Price discrimination in a competitive market is a strategy which sellers use to gain market shares by increasing sales or increasing the cost of the products. Two critical conditions bring about price discrimination. One of those factors is the differences that come as a result of price elasticity, whereby a company charges people low prices with more price elasticity demand. The second factor is to prevent resale or consumer switching costs (Escobari, Rupp & Meskey, 2018). There are first, second, and third degree types of prices discrimination. In the airline industry, third-degree price discrimination is prevalent. The Airline sector is brimming with price dissemination and biasness, mostly the Third-degree price discrimination. In this article, the focus is on the third-degree price discrimination strategy and how industries such as airline are using this strategy within their scope.
Graphical illustration
According to Cattaneo et al. (2016), “Price discrimination in the airline is the situation whereby airlines tend to charge different prices for various travelers of the same distances due to their apparent nature of travel difference, such as business and leisure travelers” (Cattaneo et al., 2016). It has occurred for many years in this industry. In most cases in the airline industry, the highest prices can be thrice the low prices in the same plane. The basis of price discrimination in the airline industry is income status. Those who belong to the upper class pay more than those who belong to the lower class.
Delegate your assignment to our experts and they will do the rest.
The basis of the third-degree price discrimination is on the concept of the prices elasticity. In this case, a good number of companies and businesses try to explore the idea that is based on the price elasticity use. “ Price elasticity is a measure of the responsiveness of demand or supply of a good or service to changes in price . The price elasticity of demand measures the ratio of the proportionate change in quantity demanded to the proportionate change of the price ” (Luttmann, 2019). The graphs above illustrate the concept of third-degree prices discrimination. The airline is one of the perfect industries to explain the third-degree prices discrimination.
In the airline industry, most companies segregate customers based on price elasticity and “set prices that are higher for consumers who have inelastic demand, such as leisure travelers” (Krämer, Friesen & Shelton, 2018). In this essence, such industries tend to make more profits from customers, which is apparent from the graph above. On the other hand, some customers price sensitive, and thus as price elastic. For this nature of the customers, most of the organizations respond to them through a variety of prices changes. For instance, they can offer such customers discounts and offers to attract them and make more profits. The airline industry is one of the most competitive in the world. In this sense, any company within this industry that needs to make more profit and increase market share tend to use third-degree process discrimination. The rate of profit making, in this case, depends on how the companies separate and treat these two types of customers. “As the company strives to impress the elastic travelers, it loses in the offers and discounts it gives. Conversely, the company may gain twice or thrice the amount it loses on the elastic travelers to the inelastic travelers, which is why most airline companies widely prefer price discrimination” (Krämer, Friesen & Shelton, 2018).
Airline companies make profits from the prices discrimination strategy. However, Airline price discrimination is good for some customers but disadvantageous for others who have to cover some distances and face charges which the firm are supposed to levy on other groups such as the leisure travelers. On the other side, some customers also enjoy price discrimination in the airline industry since it favors them more than other groups of travelers. An excellent example, in this case, is the leisure travelers. “Leisure travelers tend to enjoy price discrimination since they book in earlier in advance, unlike business people who cannot book in advance” (Almansour, Megginson & Pugachev, 2018). In this sense, it is apparent that to some extent, business individuals tend to suffer more as a result of price discrimination strategy in the airline industry (Almansour, Megginson & Pugachev, 2018). To illustrate the idea of prices discrimination in the airline industry more, examining two of the best companies in this industry can be used to demonstrate how the prices discrimination takes place in the industry.
Southwest Airline price
Southwest Airline is one of the best industries in the world. Established in the year 1967, the company operates Southwest Airlines, a passenger airline that provides scheduled air transportation in the United States and near-international markets. The company commands a good percentage of the airline industry and has been doing well in the industry. A look at its prices indicates that the company is one of the entities that thrive under the third-degree prices discrimination in the airline industry. One aspect of the company is that the prices vary depending on the time at which the clients book their tickets. The company releases new booking dates every six weeks. A study of the prices in this company reveals that a person who books earlier tends to get the best deals than those who book late. The best prices are within the first three months to thirty days before the flight. The graph below is an illustration of the price discrimination that the company uses during its operation in the airline industry.
From the graph above, it is evident that the company prices are low, but there are some forms of prices discrimination that is apparent from the graph. For instance, those who book 180 days before the flight pay less. Mostly, these are leisure travelers who plan for advance vocations. In this sense, they enjoy lower prices than those who need to travel urgently in using this company schedule.
Delta Airline Price
The incorporation of the Delta Airlines company was in the year 1967. The company is one of the best and is known for its premium prices for premium service in the airline industry. Like any other company in this industry, its costs also reduce as with time or the period of booking. The graph below is an illustration of the Delta airline company third-degree prices discrimination.
Analysis of the two companies
From the graphs, it is evident that the two companies both take a similar approach to price strategy. However, the two companies place their process to favors those who book the tickets early. Since these are induvial who travel for leisure, the companies seem to discriminate the customers who need to travel argent since they have to sufferer high prices. From the above information, it is also evident that the two companies vary with regards to price. For instance, Southwest Airline charges lower prices than Delta Airline, as indicated from the two graphs. The difference in the price of the two airlines comes because of price can be tied to the price discrimination that is apparent in the industry (Borenstein, 2017). For instance, people can postulate that Delta Airline has many inelastic travelers more than Southwest Airlines. In this sense, the natures of the customers that are present Delta Airline Company contribute to its higher price compared when compared in Southwest Airlines. On the other hand, individuals can postulate that there are many elastic customers on the side of Southwest Airline. During the nature of its customers, “the company is forced to reduce its price and spend more funds on offers and discount to attract customers” (Kumaran et al., 2019).
In conclusion, price discrimination has a significant impact on business and leisure travelers. The airline industry is booming and is one of the most competitive industries in the world. From the graphs, it is evident that the companies thrive through the use of prices discrimination. Prices elasticity is the primary rationale which forces these companies to discriminate customers with regards to the prices they charge. For instance, there are two types of customers in this industry; there are those who need urgent services and those who need services for leisure. The differences in prices are thus charged with regards to such criteria to accommodate all these customers. The price discrimination is the main reason why these companies are getting more profit and high rate of revenue in the industry.
References
Almansour, A., Megginson, W. L., & Pugachev, L. (2018). Hedging Gone Wild: Was Delta Air Lines’ Purchase Of Trainer Refinery A Sound Risk Management Strategy?. Available at SSRN 2868734 .
Borenstein, S., (2017). The evolution of US airline competition. In Low-Cost Carriers (pp. 1-31). Routledge.
Cattaneo, M., Malighetti, P., Morlotti, C., & Redondi, R. (2016). Quantity price discrimination in the air transport industry: The easyJet case. Journal of Air Transport Management , 54 , 1-8.
Escobari, D., Rupp, N., & Meskey, J. (2018). Dynamic price discrimination in airlines.
Krämer, A., Friesen, M., & Shelton, T. (2018). Are airline passengers ready for personalized dynamic pricing? A study of German consumers. Journal of Revenue and Pricing Management , 17 (2), 115-120.
Kumaran, V. V., Rahman, U. T., Yeoh, K. C., Khar Kheng, S. B. M., Al Shdaifat, F. H., Gorondutse, U. A. H., ... & SBM, U. U. M. (2019). DOES LABOUR COSTS MATTER FOR THE AIRLINE INDUSTRY?. Academy of Strategic Management Journal , 18 (2).
Luttmann, A. (2019). Evidence of directional price discrimination in the US airline industry. International Journal of Industrial Organization , 62 , 291-329.
