Question

Airlines often charge different groups of passengers different prices for identical seats. For instance, business travelers, people staying only one night, and those flying on short notice often pay 3 or 4 times as much money for a seat as individuals on vacation who booked their seat months in advance, and those who stay over Saturday nights. Assuming airlines are out to maximize profit, why do they risk losing business travelers by charging such high prices? Why do they offer those staying over a Saturday night and those who book well ahead such good deals? Explain the factors that account for differences between the business travelers and these other groups.

Answer 1

This is a case of Price Discrimination. It is a practice of charging different prices for different groups of passengers for identical services. Airlines practice Price Discrimination in order to maximize its profits over a period of time. They segment the customers and charge different prices for different segment of customers. The market is segmented based on price sensitive and comfort seeking people. As business travelers look for better facilities and comfortable seats, so Airlines charge high price for them by offering such additional facilities. So the objective of Airlines is profit maximization in case of business travelers by charging them the high price compared to other passengers. Such passengers are very few, but the objective of profit maximization is being met by charging high price to these premium class customers. As each business traveler is worth large payment and help the Airlines in generating large profits, so there is a big risk losing business travelers by charging such high prices.

As Airlines is perishable services, and seats get lost if it is not booked and remained vacant for a particular day and on a particular journey. So the objective of Airlines is to run upto the maximum capacity, so that the seats are not lost and profit is maximized. In order to ensure this, good deals are being given to people who book well ahead. Moreover, there is a case of spill overs, when excessive booking is being taken by the Airlines and is unable to accommodate that many passengers on Saturday. So god deals are being offered to those staying over a Saturday night.

Business travelers are comfort seeking people and are ready to pay high price for additional comfort. Moreover, they travel on a short notice and thus book the tickets at the end moment. So they are ready to pay high price for additional comfort and end moment ticket booking. On the other hand, leisure travelers are price sensitive customers, who decide the program well in advance and thus are able to book the tickets well in advance. So they look for attractive discounts and pay low price for such deals by booking the tickets well in advance.