Price Discrimination

In the current century, a majority of individuals seek the most affordable prices for any goods or services available. However, consumers fail to understand the existence of a monopoly, which means that one to three large corporations produce diverse brands. A monopoly is generally regarded as an economic state whereby a single corporation exclusively controls the goods and services offered in various sectors. For a monopoly to be efficient, no substitute should be available for products or services along with the non-existence of a threat regarding the potential entry of a rival. Various aspects, such as single price monopolies exist in the business circles. According to Aguirre Cowan and Vickers (2010), a single-price monopoly may be identified as charging consumers a similar price for products and services. However, not every monopolist engages in a single price monopoly. A majority of monopolists have since discovered the ability to enhance the profit margins through price discrimination.

Various products and services are tied to the aspect of price discrimination, for instance, in the airline industry. Even though there are different airlines in nations such as the USA which fly domestically, only one or two carriers ply the domestic routes. This is attributed to the market power and the airline’s ability to incorporate their prices. According to Puller and Taylor (2012), the prices charged by the airlines are reliant upon the season and the days of the week. In addition, daily flights are considered to be more affordable as compared to occasional flights as they are mainly used by those that travel on business trips. If a person is willing to acquire a non-refundable ticket, two months before traveling, the trip would cost less depending on the destination. Nonetheless, in cases of emergencies, a similar ticket may be higher for the same distance. The scenarios illustrate that one consumer receives the same service at a higher cost; therefore, the carrier would have accumulated much profit due to last minute flights. The airline could achieve a significant profit margin as a result of the impromptu flights, despite little changes regarding the flight, such as the booking time.

There are aspects attributed to price discrimination as airlines seek to gain a huge profit margin. This can be viewed as a carrier’s failure to have fixed charges at certain marginal cost, considering the plane’s passenger capacity. In this case, if the carrier supposedly acknowledges the existence of two sets of passengers: business and leisure travellers, each would consider flying depending on the rates. However, a leisure traveller may have a varying budget and ample time to book another flight. If the rates exceed $600, an leisure traveller may opt to choose another airline or different dates. However, if the airlines charge a flat rate of $160, a leisure traveller is likely obtain the tickets. Therefore, options may be limited when the charges are the same. If the rates are hiked, the carrier’s main revenue stream would be attributed to those that travel for business purposes. The airline may also have the option of retaining $160 for each seat and provide seats for each market, but the profit margin may be low as a result of sales to the leisure travellers. If the airlines opt to charge a similar rate for all travellers, a higher rate and foregoing the selling of tickets to the leisure traveller is more lucrative.

Since business travellers are quite insensitive to the rates, they may access various services despite the rates. On the other hand, leisure travellers may exhibit flexibility and be hesitant towards obtaining expensive tickets. Exorbitant rates may push the leisure travellers towards seeking an alternative. In order to retain both sets of travellers, the carrier may seek to charge $600 for the business traveller while also maintaining $160 for the leisure traveller. Maintaining both rates would still be above the marginal cost, thus generating additional profits. This may be considered as an illegal partaking in the United States as a result of discrimination. The carrier may face certain demands such as sensitivity towards the consumer or rate affordability and improved terms. Airlines need to charge both sets of clients while considering their willingness to meet the costs. For instance, if an individual travels using the high rates of $600 and the leisure traveller settles for $150. According to Puller & Taylor (2012), if the monopoly has the capability of obtaining the complete surplus, it accomplishes the aspect of price discrimination. Therefore, the consumers using the carrier are not entitled to consumer surplus, and the complete surplus aspect is obtained by the carrier, which is the monopolist.

Conclusion

The sole aim of price discrimination is increasing the revenue stream and profit margins within a firm through the sale of services to those believed to be insensitive to high rates. The aspect of price discrimination is not considered to be in airplane corporations but in other areas—for instance, discounts amongst senior citizens, on coupon codes, as well as in theatres.

 

 

References

Aguirre, I., Cowan, S., & Vickers, J. (2010). Monopoly price discrimination and demand curvature. American Economic Review100(4), 1601-15.

Puller, S. L., & Taylor, L. M. (2012). Price discrimination by day-of-week of purchase: Evidence from the US airline industry. Journal of Economic Behavior & Organization84(3), 801-812.

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