Airline price discrimination

Price discrimination involves charging different prices to different sets of consumers for the same good. Firms can charge different prices depending on several criteria:

Quantity bought (e.g. lower unit price when higher quantity is bought)

Time of use (higher price at peak times)

Age profile (e.g. discounts for OAPs)

When unit is bought (e.g. discounts for buying early)

The main principle behind price discrimination is that a firm is trying to make use of different price elasticities of demand. If some people have a very inelastic demand, it means they are willing to pay a higher price. If the firm can set higher prices for these consumers it can increase its revenue and profits. Other consumers will be more sensitive to prices (elastic demand) and so will respond to special offers and price discounts. The firm can benefit if it can separate these consumers and therefore reduce their consumer surplus.

In the real world, price discrimination might involve charging a different price for a slightly different good.

How does an Airline practice price discrimination?

Time of buying ticket. There is no hard and fast rule, but if you buy a ticket several months in advance it tends to be cheaper. If demand for the particular flight is high, then the airline starts putting up the price of that flight. It means that the remaining tickets will only be bought by people willing to pay a higher price (inelastic demand). If a particular flight is not selling very well, the airline will do the opposite and reduce price. This lower price attracts more people who are sensitive to prices and ensures that the flight will fill up.

Ideally, the airline would like to fill up the plane with passengers paying the most they are willing to pay. There is no point in selling very cheap tickets and having the flight sold out many weeks in advance.

Why does the price of an airline ticket change from hour to hour?

You may have had experience of looking for airline ticket and seeing a flight for $200. The next day, you return to buy ticket, but see it has gone up to $220. This is very annoying, but is due to price discrimination. The airline will reserve a certain number of economy tickets at a low price (to attract early customers more sensitive to price. But, if the tickets for flight are selling well, it can afford to charge higher prices for the remaining few tickets. The airline is trying to capture as much consumer surplus as possible)

Unsocial hours cheaper. Because some flight times are less popular, these flights will tend to be cheaper. For example, if you take a weekend break. Most people would prefer to come back late on Sunday. These late Sunday flights tend to be more expensive than early morning Sunday flights.

When you travel. Travelling at peak times will be much more expensive. One good example is travelling during the week. I was once looking at airfares from Australia to Dubai  in October. From Monday to Friday, the cheapest fare was over $1,000 – I was shocked at the cost. But, when I changed the date to Saturday to Saturday, the price fell to $650. The reason is that the customers travelling Monday to Friday are businessmen. Their demand tends to be more inelastic (because it is paid by company expenses). If you are more flexible and willing to travel at the weekend, you are more sensitive to price and have a more elastic demand. Airfares also vary depending on the time of the year. During peak summer holidays, airfares are more expensive. Parents have more inelastic demand because they can’t go on holiday during term time.

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31 thoughts on “Airline price discrimination

  1. Airline pricing is a very interesting subject and I do go through this experience pretty much every fortnight as we travel a lot within Australia and of course Overseas once in a while.
    As you have well elaborated, the price discrimination is a key in this field and they play with it very well to make the best out of every flight. Of course, they even sell more tickets than they actually can accommodate in the scheduled flight, I have got caught to one of those couple of months ago.

    I also have gone through another good example of price discrimination based on demand; when Fremantle Dockers played in the Footy finals in 2013, I had to pay $ 1,250/- to get back to Melbourne (one way) from Perth, whereas I have travelled in the same segment for 300-400 dollars in some occasions.

    Having different rates for students is also an example of price discrimination.
    The consumer needs to be vigilant about how industry operates and act smartly, so that they can benefit or get reasonable deals without getting caught. Of course, that is only if the demand is elastic.

    but the marketers are well aware that if you have to fly you have to fly, so there is a high percentage whos demand will be inelastic.

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    • Yes samuel i agree with you even when i went to see the 2011 cricket worldcup semifinals in mohali from mumbai i had to pay around $350 and normally when i travel there i pay around $120 to $150

      Liked by 1 person

  2. I found very interesting they way that airlines business works. Some customers use to buy tickets to cheap airlines, and after the flight it is very common to hear bad reviews about the airline, the service, the food, etc. However, for the next trip the same customer will buy tickets to the same airline, even when the last experience was not good. This is due to this customer is price sensitive or has an elastic demand, and the most important thing for she or he is the price, and even with a bad service, this customer is going to keep buying in the same airline. Airlines know about this behaviour, and this is the reason they don’t invest much in service to keep customers happy.

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    • Hi lina I certainly agree with you and as you said that most of the customers are price sensitive so even if the service is bad they are going to travel but i also think that many frequent flyers buy cheap tickets because buying expensive tickets and flying frequently will hurt their pockets.

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  3. nice article, another example of price discrimination the springs to mind is that of the mining towns in WA and Queensland. Having to fly into small airports nearly every week for work, the demand within my company was very inelastic- if we had to go then we had to go no matter the cost. Sometimes a Brisbane to Emerald ticket was more than i have paid to fly to Canada. But as you point out, the airlines know that the supply is limited with small planes and the demand was strong. Things have settled down a bit these days, but price discrimination in the form of charging premium rates was certainly at a high a few years ago

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    • Hi michburtt i agree with you when i was in mumbai once i paid around ₹30000 which is around $600 to travell to goa in december end which is just a 45mins flight which you can normally get for $100 and the reason i had to pay that much was because the daily frequency from mumbai to goa is less and it was season time there

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  4. It is well known that the airline industry haspracticed price discrimination for many years. We all know that on each flight the passengershave paid different prices, and that in some caseswe can observe that the highest price is as muchas five times the lowest price. You can buy an expensive, flexible ticket. Thenyou are allowed to reschedule the flight or evencancel it without any costs.Price Discrimination help Firms increasing revenue. This will enable some firms tostay in business who otherwise would have made a loss. Increased revenues can be used for research and developmentwhich 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. adultscould be unemployed. There may be administration costs in separating the markets. Profits from price discrimination could be used to finance predatorypricing. frequent flyers programs are important in theairline industry. It implies that those who aremembers of such a program can earn memberpoints for each flight and later use the points to claima free bonus flight.It can be seen as a kind of discount,and in thatrespect it is a kind of price discrimination.Therefore, we will also consider the welfare effects offrequent flyer programs.

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  5. Great post about an issue that is important to many of us traveling frequently. A few comments I have picked up in my experiences.

    Ive noticed a few ways that the public have hit back against the airlines and these issues. By always saving all frequent flyer points and using them in an emergency you can often avoid the purchase of an exorbitant last minute fare; the points cost does not seem to rise as rapidly as the monetary option. From the airliners perspective this seems to be a good way of ensuring that they are not discriminating against their loyal customers as much as punters.

    I’m unsure how much this practice occurs as the airlines have called it a breach of their T&C’s but there was a big scheme going on particularly in the USA recently. Sometimes you could purchase a flight with a stopover in your destination city cheaper than you could a direct flight, then simply jump off at the stopover. There was even search engines for finding these ‘multi-city flight’ deals.

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    • Hi dan yes i agree that the frequent flyers can avoid extraordinary last minute fares by using the points but as u know to get those kind of points you need to fly around 15-20 times and i thing that this is a disadvange because if der was a high price and you used all your points to make the ticket reasonable enough to travel and the very next time you are in a emergency again and you are buying the tickets at very last moment, then you would have to simply pay the high fare and travel. But the advantage is you get points on that and once in 4-5 emergency situations you can save your money and yes many people travel in connecting flights because the fare are much cheaper than the direct flight.

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  6. Interesting blog.
    This make me think that membership cards are price discrimination in the retail environment to some extent. Supermarkets wants to charge different prices to customers depending on what they’re willing to pay, then, they create the Loyalty cards mechanism. also, do you think that smartphone apps that serve up coupons depending on your purchasing history is another one?

    Well, one of the reasons that loyalty cards are worthwhile to supermarket chains is because they allow them to track your consumption habits in detail. They can then sell this information for a fair amount of money. Matt Yglesias suggests that this is “admirably transparent,” but I doubt that. Most of us overeducated blog-reading types probably know about this, but among the general public I suspect that the number of people who know what Safeway does with their consumption data is very tiny indeed.

    Many firms have the ability to charge prices for their products consistent with their best interests even thought they may not be characterized as monopolies. These price makers operate in competitive markets but find that due to unique characteristics of their products or industry they may have some discretion over product pricing.

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    • yup i agree with you that loyalty cards are to track the behaviour of the loyal customers and they normally see how do they react to the prices they have kept for the day and also i strongly believe that the loyalty card is a way to discriminate price.

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      • Thanks for agreeing with my point. Although some consumers do aware the fact of prcing discrimination wth loyalty cards, they tend to follow the trend and even spend much more in order to obtain one loyalty card for themselves as compensation for the excessive spending. this create a vicious circle that the marketer really want to see in their “loyal” consumer base.

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  7. If it wasn’t for business travel in Australia, im not sure any airline in Australia would survive. I work in the finance department of an Australian company with offices throughout Australia so our employees travel regularly. Its very hard to enforce staff to book flights ahead of time so we often pay top dollar for last minute flights which is a cost of doing business for us. I couldn’t see regular holiday goers paying in excess of $500 for quick flights between Canberra/Sydney/Melbourne but we do every week.

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    • Yes normally people working in offices have to travel at the last moment so they cant book tickets in advance and pay in excess and travel.

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  8. Enjoyed reading your review being a frequent business traveller. I know I am less price sensitive during business travel as arrangements are made last minute, no flexibility in timetable compared to booking my holiday travel when I can book well in advance and review different date options to provide cheaper options. How can we criticise airlines seat pricing when they wish to maximise profit on every seat based on the fundamental principle of supply and demand principle. As a consumer I have the choice to choose another date or airline if not accepting of pricing.

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    • normally when we book tickets we compare the prices of the other airlines and pick the cheapest between that. But in that also we tend to face price discrimination due to different modes of booking like online or through an agent or directly from the airlines office and i also believe that it is fair from their side because they sell the tickets at the cheapest price at the beginning and charger a higher price after they reach their break even point and they charge higher prices to earn profits. Even if me and you run an airlines we would aim to earn profits and not end up getting losses.

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  9. Airlines are experts at price discrimination and the fare you pay could end up being significantly different to the person sitting next to you, receiving exactly the same service.
    When the booking is made, the highest prices paid are when it is booked last minute and when it is booked a long way in advance, the cheapest time tending to be about six weeks before the flight. That is what some people do. They go online and look at two different scenarios – one a flight to be booked in six weeks time and one that night. But last minute travel is not always people’s choice.
    I have read an interesting article and would like to share with you. Basically, This is about the differences on the prices on the Auckland – London route which is a minimum of 24 hours, depending on the length of the stopover. A survey of return fares over two different time periods shows that the Auckland – London return fare (at around £1400) is nearly twice as expensive as the London – Auckland return fare (approx. £800). With at least nine airlines operating the route there is plenty of competition but the fare structure is similar with all of them. An Air NZ spokesman said that it was simply that there was more demand for the Auckland – London return and the cheapest fares sell out first.
    But of course these seats are the same – a flight from London to Auckland will have both passengers on their first journey and those on their return journey. The Air NZ UK website does not allow customers to book return journeys that start in Auckland which enables them to discriminate by location. However, price discrimination occurs when the same good or service is sold at different prices and it could be argued that a London – Auckland return ticket is a different service to Auckland – London return. So what seems like a simple case of price discrimination depends on the assumptions made.

    http://beta.tutor2u.net/economics/blog/airline-price-discrimination-is-this-an-example

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    • interesting fact but as you know that they want to earn high profits and price discrimination is normally the primary way to earn money.

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  10. My experience is different with yours. I am planning to buy a ticket from Melbourne to Sydney with Jetstar and the weekend price is more expensive than weekdays’ price. It is more expensive about $30-40 on the weekend. Does the weekend price discrimination apply to all domestic and international flights or only to international flights like what you mentioned above?

    However, I agree with you. Airlines are very clever using the off peak and peak times for their price discrimination. They also follow each country public holiday for their price discrimination. For example, during Australia’s public holiday, ticket prices are more expensive than any other normal days but when you buy the ticket with the same date from other country (same airlines) to go to Australia, the price is less expensive because on that day it is just a normal day in that country. They adjust their price according to each country off peak and peak times. Well, for all universal public holidays (e.g. Christmas and New Year holiday), ticket prices are almost the same in every country and they are very expensive.

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    • i think price discrimination applies to both domestic and international flights.i would like to share my experience that when the trimester ended in October i went to India i paid $900 and when i was coming back in march even when i booked my ticket 2 months in advance i paid $1500 because cricket world cup was hosted by Australia and the prices were high.

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  11. Service industry is the perfect ground to exercise price discrimination. This is due to information asymmetry between the customers and the service providers. Unlike the service industry, manufacturing industry cannot perform price discrimination because the costing of the products can be easily figured out by the consumer and the price of the product would not change much from one retailer to the other. Furthermore, the price of the product will not change much over time. For example, a cup of latte consists of milk, coffee and the cups. The price of lattes between cafes around Melbourne will be around $3.50 – $4.00. If I buy a cup of latte today the price would be the same if I buy it next month because of unlimited supply whereby the producers will continuously produce the products as long as there is demand for it.

    For service industry, it is hard to put an exact number on the service they will be receiving. Yes, you can calculate the physical cost of it buy it is the experience that can really spike the price. Take an airline industry, the cost of operating the airline is generally the fuel, the plane, the pilot and the stewardess. However, the company may discriminate the pricing of the same flight to different customers based on the experience that they provide to the customers.

    For example, AirAsia price the seats differently, some seats will be more expensive because they have a bigger legroom and a business class is cost as much as double just because they can turn their seats to beds.

    So yeah, we can’t really run away from price discrimination especially in the service industry where we are actually paying for the experience rather than the product itself.

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    • I certainly agree with you that service industry has a greater scope of practicing price discrimination rather than the manufacturing industry and yes the pricing of the ticket is done on the basis of the service rather than the cost they incur

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  12. Airline pricing is pretty complicated. They also have the two tier pricing, where you can pay extra to check a bag through, add insurance, add car hire, etc.There was a big deal made of it in England a few years back as price sensitive parents were taking their children on holiday during term time and the schools felt that children were missing too much school. People thought that the airline prices should be more strongly regulated by the government during school holidays so families could go on holiday then. However, nothing actually changed. The best thing for the consumer is to know how the system works so they can get the best price. Many tips for which you have provided. Thanks!

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    • Yup normally during holidays the prices for the tickets are very high and if the families are planning a vacation, they should book the ticket well in advance, so that they can get the cheaper and save the money.

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  13. I travel from Melbourne to China at least once a year to visit family. It always surprises me how much the price of a return ticket can vary around Christmas holiday. I had to travel during peak season with average price around $1,900. And I know that I could get a return ticket as low as $900 during off-peak season. My choice is limited due to work commitment. Even though I tried to book as early as possible, I still cannot avoid the price hike that time of the year.

    There are significantly more demand during Christmas holiday, but aren’t we all just paying for airlines trick?

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    • Yup normally during christmas times the tickets are very expensive when i went to India during the time of Diwali i paid $1200 and normally you get the ticket for $750 maximum

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  14. Every month i travel for work between Auckland and Alice Springs and have been stung many times for cleaving it to late. A really well written piece and i fully understand the reason behind the Airlines pricing strategies

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  15. Price discrimination exists everywhere in service industry. Say Hotels, accommodation, if you pre-book a few months ahead on non-public, off peak season, the price usually is very cheap. However, public holidays, school holidays or weekends tends to be very expensive. Of course when last minute deal when hotel still have vacancy they will slash the price to maximise their sales.

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  16. Airline pricing in my book is understandable. Annoying but understandable. I guess frequent travelers are so used to it, it has become the norm.

    What i cant get my head around is price discrimination based on location in various retail outlets. A situation where you have one retail outlet in an affluent suburb charging higher prices for their goods that the same brand retail outlet found in middle to low income suburb.

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    • Price discrimination these days is such a science. Take for example the major groceries stores have so much customer information and buying preferences from their rewards programs that they can be very confident in the pricing of goods to maximise profits. What’s scary is that these companies probably have a better idea of your buying preferences than you yourself does!

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