Price discrimination on ticket of airlines

Price discrimination on ticket of airlines (Price difference between same classes but different prices paid by customers)

 

Statement of the problem

Airline pricing structures designed to accomplish segmentation are widely used elsewhere in the economy phenomenon is misunderstood, because of business in which segmentation is obvious, because history has linked price discrimination with monopoly power. Improved understanding of the basis of price discrimination and its relationship to competition will help make better public policy and correct gaps in existing economic theory. In thinking about price discrimination, economists have constructed the following argument, in competitive market, price equals marginal cost. Wherever there is price discrimination, price deviates from marginal cost, if there is price discrimination, the market must not be competitive and there must be market power. Thus, economists then often go on to say that given that market power already exists, price discrimination can be output-increasing and is therefore not necessarily bad, but there is general assumption that the existence of price discrimination implies the existence of market power.

 

Research towards dispersion in the prices an airline charges to different passengers on same class/route, the variation in fares is substantial as expected absolute difference in fares between passengers on route can imply better percentage of the airline’s average ticket price. The pattern of observed price dispersion cannot easily be explained by cost differences alone. Dispersion increases on routes with more competition or lower flight density, consistent with discrimination based on customers’ willingness to switch to alternative airlines or flights. The need to argue that the data support models of price discrimination in monopolistically competitive markets. Developing model of price dispersion to distinguish the impact of price discrimination from that of peak load pricing schemes or atypical competition resulting from financial difficulties of the present times. Upon utilizing three alternative measures of dispersion and appealing to economic theory for specification, finding robust results of estrangement between price dispersion and price discrimination. While some discrimination continues to persist at monopolized endpoints, most dispersion is associated with fare wars and peak load pricing schemes.

 

How the customers react to his price change or how the airline is not loosing any customers?

Of course, customers react to price change as airline may loose loyal customers and since, price discrimination among ticket service classes will be analyzed when aggregate demand is known and customer preferences are private information. Serving customers in cheap second‐class seats limits the seller’s ability to extract surplus from expensive first class seats because some switch to the lower class. Discrimination is greatest in the class with the largest variance in demand prices. The seller’s incentives to limit substitution by altering the between‐class quality spread and the pricing of complementary goods are to be analyzed. When capacity limitations require sequential servicing of buyers in batches, intertemporal price discrimination requires prices to decline over time, so customers with the greatest demand prices buy higher priced tickets to earlier performances rather than wait for performances. The analysis use unique data to provide complete analysis of factors affecting airline price levels and price dispersion, contributing to understanding of airline pricing that includes ticket characteristics and restrictions, carrier, estimated flight level load factors, date of issue, departure date, other hedonic factors affecting prices, whether the ticket has been purchased online or offline, share of online purchases. Theoretical analysis of price discrimination have investigated how the competitive dimension affects the price discrimination and the price dispersion in imperfect competition environment ( (1985);  (1989);  (1995);  (2000) and (2002). Studies show that price discrimination persists and may increase as market moves from monopoly to imperfect competition. Price discrimination behavior must be précised when competitive dimension is present. Actually, in monopoly markets, firms sort consumers on the basis of their willingness to pay. When competition is introduced, firms must consider that consumers differ not only as regards the utility they derive from good, but regard their preferences among different brands. The expected effect of market structure on price dispersion depends on whether monopoly-type or competitive-type discrimination dominates.  (1985) and  (2000) emphasize these different aspects of price discrimination under spatial competition. Borenstein develops third-degree price discrimination, while Valletti deals with second-degree price discrimination in context of imperfect information. Does price discrimination increase or decrease?  (1985),  (1989), and  (1993) show that price discrimination may increase as the market becomes more competitive as Gale’s theoretical model there is more price discrimination under duopoly than under monopoly. Empirical evidence to support or reject the hypothesis is scant, however. Despite growing literature on airline pricing, few analysts have examined the price-discriminatory mechanisms that airline use. The existing studies of the airline market show that as market concentration increases, so does the average price level ( (1992),  and  (1990). In the only empirical paper that studied the relationship between the distribution of fares for individual flights and market concentration in the airline market,  and  (1994) found a negative effect of market concentration on price dispersion, no studies have analyzed the effect of market concentration on price discrimination in the airline market.

 

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