The document discusses price discrimination in the airline industry. It defines price discrimination and the two main conditions required: differences in price elasticity of demand and preventing resale. It describes the four main types of price discrimination - first degree charges the maximum price, second degree uses quantity discounts, third degree splits the market into segments, and fourth degree incurs different costs. The document then discusses how the airline industry uses various forms of price discrimination, including flexible tickets, corporate discounts, and frequent flyer programs. It analyzes how price discrimination allows airlines to increase revenue but can also reduce consumer surplus.
Students should be able to:
Explain and evaluate the potential costs and benefits of monopoly to both firms and consumers, including the conditions necessary for price discrimination to take place
Diagrams should also be used to support the understanding of price discrimination
Price Discrimination, Types of Price Discrimination , Condition of Price Discrimination , When Price discrimination is possible, Degree of Price Discrimination, Dumping
Students should be able to:
Explain and evaluate the potential costs and benefits of monopoly to both firms and consumers, including the conditions necessary for price discrimination to take place
Diagrams should also be used to support the understanding of price discrimination
Price Discrimination, Types of Price Discrimination , Condition of Price Discrimination , When Price discrimination is possible, Degree of Price Discrimination, Dumping
Application of indifference curve analysisYashika Parekh
The law of demand expresses the functional relationship between price and quantity demanded.
Assumption of ‘ Ceteris Paribus’. A hypothetical assumption
If price of a commodity falls, the quantity demanded of it will rise and vice versa.
Inverse relationship between price and quantity
Other factors also play an important role.
Real world variables.
The indifference curve analysis has also been used to explain producer’s equilibrium, the problems of exchange, rationing, taxation, supply of labour, welfare economics and a host of other problems. Some of the important problems are explained below with the help of this technique.
(1) The Problem of Exchange:
With the help of indifference curve technique the problem of exchange between two individuals can be discussed. We take two consumers A and В who possess two goods X and Y in fixed quantities respectively. The problem is how can they exchange the goods possessed by each other. This can be solved by constructing an Edgeworth-Bowley box diagram on the basis of their preference maps and the given supplies of goods.
Application of indifference curve analysisYashika Parekh
The law of demand expresses the functional relationship between price and quantity demanded.
Assumption of ‘ Ceteris Paribus’. A hypothetical assumption
If price of a commodity falls, the quantity demanded of it will rise and vice versa.
Inverse relationship between price and quantity
Other factors also play an important role.
Real world variables.
The indifference curve analysis has also been used to explain producer’s equilibrium, the problems of exchange, rationing, taxation, supply of labour, welfare economics and a host of other problems. Some of the important problems are explained below with the help of this technique.
(1) The Problem of Exchange:
With the help of indifference curve technique the problem of exchange between two individuals can be discussed. We take two consumers A and В who possess two goods X and Y in fixed quantities respectively. The problem is how can they exchange the goods possessed by each other. This can be solved by constructing an Edgeworth-Bowley box diagram on the basis of their preference maps and the given supplies of goods.
Switching CostsThere are three types of costs associated whe.docxrhetttrevannion
Switching Costs
There are three types of costs associated when a consumer chooses a competitor’s product or service. The first is termed
Procedural switching costs
, which involves lost time and effort. One thing working in consumers’ favor is the Internet. For example, bank customers use online technology for most routine matters, and most consumers prefer to use this option with their existing banks, rather than learn a competitor’s system. iPhone suffered negative publicity during release of iPhone 3 due to the way users held the phone. It led to dropped calls and reception problems. Even through negative publicity, iPhone users were reluctant to switch products due to procedural switching costs. As another example, retailers try to build consumer loyalty through the use of loyalty cards and programs. However, this rarely truly builds consumer loyalty, other than procedural loyalty (Babin & Harris, 2013).
The second type of cost is
Financial switching cost
. This is the total amount of money that is spent or invested in learning how to obtain value from the new product. For example, some service providers offer bundled pricing on several service, and therefore, consumers are less likely to purchase each separate product/service from competitors.
Lastly, there are
Relational switching costs
involved with changing providers. Relational switching refers to the psychological and emotional consequence of changing from one business to another. An example of this is how attached consumers get to their hairstylists and tend to go the same person for years, rather than find a more convenient salon.
Of the three, evidence suggests that the latter is most resistant to marketers’ influence (Babin & Harris, 2013). Just like consumer loyalty card programs, those consumers who are not emotionally attached to a store or brand will likely switch to a competitor if the price is right. Therefore, marketers must try to build an emotional bond with consumers and their product, thereby creating a relationship.
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2. DEFINITION
The offering of similar or identical goods at
different prices to different buyers.
The setting of a price differential on similar goods
that is not based on differences in the cost of
production.
3. Two main conditions required for
price discrimination to work
Differences in price elasticity of
demand:
• Charge a higher price to group with low
PED
• Charge lower price to consumers with a
more price elastic demand
Prevent resale / consumer switching
• Easier with services than goods
• Time limits – product bought at certain
time
• Photo cards / identification systems
• Electronic / digital ways of protecting
usage
4. Types of Price Discrimination
1. First degree price discrimination This involves charging
consumers the maximum price that they are willing to pay. There
will be no consumer surplus.
2. Second degree Price discrimination This involves charging
different prices depending upon the quantity consumed. For
example, after a certain number of units consumed, electicity
tariffs tend to be lower.
3. Third degree price discrimination This involves charging
different prices to different groups of people. The firm may split
up the market according to segments based on
age, income, time of day.
4. Fourth degree price discrimination. This occurs when the
price consumers pay is the same, but the firm incurs different
costs. e.g. a firm may charge same price to a disabled
passenger, even though it faces higher costs.
5. Premium pricing. This occurs when firms charge different
prices for slightly different variations of the good. For
example, the firm may charge an extra 30p to consumers who
get 'organic coffee'. The organic coffee may only cost 1p extra to
firm.
5. 1st Degree Discrimination
Sometimes known as optimal pricing
The firm separates the market into each
individual consumer and charges them the
price they are willing and able to pay.
If successful, the business can extract the
entire consumer surplus that lies underneath
the demand curve and turn it into extra revenue
or producer surplus
6. 2nd Degree Price Discrimination
Selling blocks of tickets / products
in larger quantities
Getting rid of excess inventories /
stocks when demand is low
Standby tickets for
hotels, theatres, flights etc
Peak and off-peak pricing schemes
e.g. travel, telecommunications
7. 3rd Degree Discrimination
Most frequently found form of price
discrimination and involves charging different
prices for the same product in different
segments of the market.
The key is that third degree discrimination is
linked directly to consumers’ willingness and
ability to pay for a good or service.
It means that the prices charged may bear little
or no relation to the cost of production
8. Advantages of Price Discrimination
Firms will be able to increase revenue. This will enable some firms to
stay in business who otherwise would have made a loss.
Increased revenues can be used for research and development
which benefit consumers
Some consumers will benefit from lower fares.
Disadvantages of Price Discrimination
Some consumers will end up paying higher prices.
Decline in consumer surplus.
Those who pay higher prices may not be the poorest. E.g. adults
could be unemployed.
There may be administration costs in separating the markets.
Profits from price discrimination could be used to finance predatory
pricing.
9. PRICE DISCRIMINATION IN
AIRLINE INDUSTRY
It is well known that the airline industry has
practiced price discrimination for many years.
We all know that on each flight the passengers
have paid different prices, and that in some cases
we can observe that the highest price is as much
as five times the lowest price.
You can buy an expensive, flexible ticket. Then
you are allowed to reschedule the flight or even
cancel it without any costs.
10. Another common characteristics in many national
markets is that large firms that demands airline
tickets write a contract with an airline, where the
firms’ employees receives a certain discount on each
airline ticket.
This kind of price discrimination, where different
groups are charged different prices, is therefore a
type of price discrimination.
11. Finally, frequent flyers programs are important in the
airline industry. It implies that those who are
members of such a program can earn member
points for each flight and later use the points to claim
a free bonus flight.
It can be seen as a kind of discount,and in that
respect it is a kind of price discrimination.
Therefore, we will also consider the welfare effects of
frequent flyer programs.
Based on the characteristics of this industry, three
different kinds of price discrimination exists.
(i) versioning, (ii) discounts to large consumers and
(iii) frequent flyer programs