An Example of Price Discrimination
Discuss an example of price discrimination.
Economics exists everywhere in our life. It plays an important role in explaining how the world works, how people behave in the society and how the government makes decisions on policies to deal with the relations with other countries. However, today I’m going to talk about something about “price discrimination”, which, from my perspective, is the most wise and efficient way for a company to maximize its revenue.
Price discrimination, by definition (on Google), is the action of selling the same or similar product at different prices to different buyers, in order to maximize sales and profits. In my opinion, selling the airline tickets is one kind of price discrimination.
Let’s look at the flight prices of four airline companies (American Airlines, Southwest Airlines, United Airlines and Delta Airlines) as an example. I randomly choose a single trip from Boston (BDL) to Los Angeles (LAX) on a weekday April 17th(Monday), the regular ticket prices for the four airlines companies are: American Airlines 300-500 dollars; Southwest Airlines 300-400 dollars; United Airlines 200-400 dollars; Delta Airlines 400-600 dollars. Then, I also look up prices for a single regular trip on April 21st, a Friday, the ticket prices are obviously cheaper than that on a weekday: American Airlines 300-500 dollars; Southwest Airlines 250-300 dollars; United Airlines 300-600 dollars; Delta Airlines 200-350 dollars. By comparing those flights, we can find that the prices for the flights on the same day does not vary a lot from those four different airline companies. The highest and lowest prices vary about 100 dollars. In addition, while looking through the prices for the whole week from April 17th (Monday) to April 22nd (Saturday), we can find a phenomenon that for all those airline companies, the flight prices from Monday to Saturday gradually become lower. Flights on Sunday are still very cheap but have slightly higher prices than that on Friday or Saturday (several dozens of dollars higher). The most expensive tickets in the week are on weekdays, especially a typical weekday such as Monday or Tuesday. The flights on weekends are cheaper than that on weekdays. Flights within better time periods are more expensive as well-flights in the morning or in the afternoon are more expensive than that early in the morning or at late night. Of course, first class flights are way more expensive than the regular ones because they have larger space and better meals and drinks served.
Now you may have a question that “Why flights on weekdays are more expensive than that on weekends”? Generally, people travel on weekends so flights on weekends have higher demands; however, flights on weekdays are for business purpose and are more demand inelastic than flights for tourists. Tourists have a various choices of ways of transportation (many substitutes) to reach their destination-by bus, by car, by train. If the flight ticket is too expensive from their imagination, they can even easily change their destination for travel. On the other hand, if a businessman needs to go to somewhere to attend a meeting, he or she must go to that place on time for business profit. It is not easy to change a destination or give up journey because of high flight prices. Usually the ticket prices are paid for businessmen by company, they don’t have to pay it themselves, so why not go on a business trip? Business meeting is more important than a traveling purpose. In this way, airlines companies successfully take advantage of demand elasticity to set flight prices using price discrimination.
In contrast, flight prices on holiday sessions are consistent in general, regardless on weekdays or on weekends. For example, for the coming Spring Break in March from March 11th to 18th, the ticket prices of Delta Airlines are always approximately 300- 600 dollars-does not vary a lot. But they are not as cheap as usual for weekends. In a word, they are a little bit higher but not as expensive as that on weekdays either. Maybe it is because tourists’ demand at this time is more inelastic than usual but not as inelastic as that of businessmen either. Holiday is a time to go out and have fun instead of staying at home and being bored. Most people will still choose to go to the destination they plan to go and enjoy the break if the price does not rise too much.
The airline industry is oligopoly-several big airline companies; they continue improving flight services to compete with each other to attract consumers while they still corporate on price setting. The price range of flight tickets does not vary a lot. The prices of flights with the same journey, on the same date and during the same time session of different airline companies are approximately the same.
From my point of view, the most successful company is the one that can use different methods on price setting in order to earn as much money as it can from different groups of consumers, which is the company that uses price discrimination. Since different groups of consumers have different levels of income and purchasing powers, the only way for a company to do so is to set different prices of the same product (or very similar product) for different people groups-lower for the poorer ones and higher for the richer ones; lower for those who don’t want it much and higher for those who really want it; lower for elastic demand and higher for inelastic demand. Companies may always want to sell their products at a high price but they need to lower the price to attract consumers and to become more competitive. That’s why the price is lower for more elastic demands-consumers have more choices and substitutes. To some extent, price discrimination is not easy to carry out because if the company doesn’t plan very well, it may face the situation that-all its consumer groups buy the same product at its lowest price and nobody buys at its higher prices. Also, there’s another difficulty for price discrimination: those who don’t need or don’t want the product can successfully buy the product at a lower price and re-sell it to others who really need and want it for an extremely high price, which indicates that some consumers earn the profits that should originally belong to the company. (for example, scalpers)
In summary, price discrimination is a very wise way for a company that has some kind of market power in the industry, but not every company is suitable to use price discrimination to maximize its profits. Price discrimination won’t be useful for companies in perfect competition market because companies cannot charge any price they want-if their price is higher than the market price, nobody will buy their goods since all the goods are standard and there’s no difference from products selling by one company than the other. And not every company can use price discrimination in the most efficient way-there are problems like scalping. Scalping is the most difficult problem for price discrimination because the company cannot prevent a consumer from trading the same product again with another consumer.
References:
American Airlines https://www.aa.com/homePage.do
Southwest Airlines https://www.southwest.com/?clk=GNAVHOMELOGO
United Airlines https://www.united.com/ual/en/us/
Delta Airlines http://www.delta.com