...Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins * Federal Reserve Bank of Boston 600 Atlantic Avenue Boston, MA 02106 (617) 973-4217 e-mail: joanna.stavins@bos.frb.org November 25, 1996 * Economist, Federal Reserve Bank of Boston. The views expressed in this paper are those of the author and do not necessarily reflect the official views of the Federal Reserve Bank of Boston or the Federal Reserve System. Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins ABSTRACT Economic theory suggests that a monopolist can price discriminate more successfully than can a perfectly competitive firm. Most real-life markets, however, fall somewhere in between the two extremes. What happens as the market becomes more competitive: Does price discrimination increase or decrease? This paper examines how price discrimination changes with market concentration in the airline market. The paper uses data on prices and ticket restrictions across various routes within the United States, controlling for distances and airport gate restrictions. Price discrimination is found to increase as the markets become more competitive. Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins In a perfectly competitive market, firms have no market power to discriminate by price. At the other extreme, a monopolist can, provided he has information about...
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...known that the airline industry uses a different mechanisms to price discriminate (PD) consumers with varying elasticities of demand in terms of travel.[1] In this case study, I will investigate PD based on the day of the week a ticket is purchased. In theory, this method of price discrimination is very feasible as airfares can be easily changed on a day to day basis. For example, consumers who travel on any given day of the week but purchase on the weekend may have different PED than those consumers who purchase their tickets during the week. By comparing different days of the week and ticket prices, we can study whether the airline industry has identified this method as a valuable segmenting device. I will start this case study by defining the theory of PD then continue by assessing data regarding ticket prices and day of week of which purchased then conclude if there is enough evidence of PD. Price discrimination is the practice of charging consumers different prices for the same good or service, whereby the relevant price in each case depends on the buyers characteristics. The most common form of PD would include grouping consumers based on certain attributes and charging these groups a different price. In pure price discrimination, the price of a good or service will be set at the maximum of which each consumer is willing to pay. The goal of PD is to gain an extra slice of untapped revenue source from consumers who are willing to pay a higher price and those consumers...
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...the trends in the car industry that changed radically from the beginning of the 80s. We examine the impacts of improvements in technology, the effects of externalities which will lead to the increase in cost, price discriminations and competitive structures. We discuss about car industry which is an oligopoly structure, and the recent environment of economic. Besides that, we also concert about the effect of externalities, on the other hand, the effect of the technological advancement and price discrimination. Finally, in conclusion, we conclude our views of the structure of oligopoly industry and how it’s changing competitive environment that will affect the market and consumers. CURRENT ECONOMICS ENVIRONMENT Global rescission influences most of the automobile manufacturing companies to cease production due to the short demand in the market. Microeconomic market factors have lowered demand and increase elasticity of demand in the car industry. For example, in Figure 1, it demonstrates the demand for the sales of cars [D1] has decreased and also become more elastic [D2]. It becomes flatter, showing the higher price change responsiveness. This is represented by a decrease in price from [P1] (at [E1]) to [P2] (at [E2]). Oligopoly industry will reduce supply when it is motivated by changes in demand. FIGURE 1 EFFECTS OF EXTERNALITIES - GOVERNMENT POLICY OPTION In 20 years time, there has been a dramatic fall of economy in the car industry. Government introduced...
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...Managerial Economics Term Paper DEMAND IN THE DOMESTIC AIRLINE INDUSTRY OF INDIA Submitted by: Akshata Shirodkar ePGP-02-002 This term paper explores the rational economics behind the demand and its affect on dynamic pricing in the domestic airline industry in India, where both of these vary often with time and units available. Based on the learning gained during microeconomics course, this paper analyses the current pricing strategies and norms practiced by the airline industry. Managerial Economics Term Paper Demand in the Domestic Airline Industry of India CONTENTS 1. INDUSTRY OVERVIEW ............................................................................................................................................... 3 1.1 MARKET SHARE ................................................................................................................................... 3 1.2 INDUSTRY GROWTH ............................................................................................................................ 4 1.3 CAPACITY VS DEMAND ........................................................................................................................ 5 2. AIRLINE INDUSTRY CUSTOMERS ............................................................................................................................... 5 2.1 CUSTOMER SEGMENTS ..............................................................................................................
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...Price Discrimination | | Most businesses charge different prices to different groups of consumers for what is more or less the same good or service! This is price discrimination and it has become widespread in nearly every market. This note looks at variations of price discrimination and evaluates who gains and who loses?What is price discrimination?Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs. It is important to stress that charging different prices for similar goods is not pure price discrimination. We must be careful to distinguish between price discrimination and product differentiation – differentiation of the product gives the supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality / performance of a good or service.Conditions necessary for price discrimination to workEssentially there are two main conditions required for discriminatory pricing * Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase its total revenue and profits (i...
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...In the modern day, there are certain laws that most industries follow in order to provide service to the public, as well as protecting employees’ well being. Such laws will allow employees to display proper ethical behaviour and often, they act as “guidelines” to how they should make sensible decisions and not succumb to personal temptations.1 Otherwise, the employer has to answer for any lack of morality. In addition, there are also laws that allow one to be socially responsible. Certain responsibilities may carry dire consequences to the public and ultimately, the industry itself, if they are not taken very seriously. Thus, industries find that such laws are important to safeguard their good image to the public and retain the public’s trust in them. This is to ensure that they will not lose their capabilities to maximize profits in this ever changing world economy. One particular industry that is firm in following such laws will be the aviation and the airline industries. In any airline industry, the safety of the passengers is their top priority. No one will be daring enough to board an airplane if the aviation crew repeatedly failed to search for any fault within the plane before it is ready for flight. Thus, it is up to the crew, consisting of engineers and technicians, to ensure that every plane has to be thoroughly checked, repaired and fueled before any departure happens. Hence, it is their social responsibility to ensure so. Such responsibility may seem too...
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...Dynamic Pricing = Price Discrimination Dynamic Pricing, the idea that prices will change according to the level of demand. Dynamic Pricing is one version of price discrimination that delivers prices to consumers based on their personal attributes and other environment related events. The different attributes are collected by the producer/retailer and are based on bits of information, like age, financial gain, and/or region one inhabitants. The price is then individualized to the consumer. Many consumers find this practice to be harmful and many companies pre-internet commerce found this practice to be overly expensive. But, now that we are out of the dark ages, companies such as Amazon, Best Buy, and (our country’s favorite) Wal-Mart could possibly be able to proceed with this idea if it weren’t looked down upon so feverishly. As for the short term aspect concerning both dynamic pricing and the retail industry, it definitely has some problems to overcome if it were to ever succeed for a long term. Because the idea is based strictly on demand, this is hard for the retail world. Most items sold in retail are items that can become quickly outdated simply because they no longer fashionable. Also it is harder to discriminate buyers when the price is published in multiple places all over the internet. As is well known from the provided literature, the Airline industry is a respected industry that also contains price discrimination. The discrimination is seen when boarding a plane...
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...Management ECON545, November 13, 2013 Price Discrimination An ethical issue that individuals face today involves the price war or price discrimination involving the airline industry. According to the legal definition of price discrimination: Price discrimination is the practice of charging different persons different prices for the same goods or services. Price discrimination is made illegal under the Sherman Antitrust Act. 15 U.S.C. §2, the Clayton Act, 15 U.S.C. §13, and by the Robinson-Patman Act, 15 U.S.C. §§13-13b, 21a, when engaged in for the purpose of lessening competition, such as tying the lower prices to the purchase of other goods or services. Price discrimination occurs when consumers are charged different prices for similar goods and the retailer cannot explain the why the differences takes place. Although the industry is one of a competitive market it benefits from the supply and demand. High demands of a particular flight allows airline companies to increase the rates and creates a scenario for a inelastic demand, individuals willing to pay a higher then expected price. This also works the same but opposite for flight that at not in high demand, the airline company now sells the seats at lower rates in hopes to secure travelers the difference is airline companies tend to withhold certain seats in hopes to sell them at a later time (prior to the actually flight date) for a higher cost. Other factors the airline company uses to fluctuate the rates involve...
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...One of the industries which perhaps has shown the most changes in market model is the airline industry in the United States. The airline industry can be analyzed different before and after deregulation and before and after the terrorist’s attacks of September 11th. These events have changed the industry in terms of both airfares and market concentration in major airports. Prior to deregulation in the 1970’s the Department of Transportation (DOT) served its goal by looking after the public interests. Once the focus of the DOT shifted to assuring airlines were operating under strict safety standards and procedures this gave a chance for airlines to take on any domestic route it felt capable of performing. Deregulation resulted in structural changes for airlines. Following deregulation, most of the largest airlines began to operate in the now well known hub-and-spoke system, which allowed for efficient connections for passengers from small- and mid-sized cities, but it also has increased airline concentration at hubs. As a result, the net effect has been to increase the choice of carriers at non-hub cities and to increase the frequency of service but also to increase the market concentration at hub cities. According to Parkin, (2011) most governments use a mechanism for allocating airport boarding gates and facilities, in some cases it even allows for competitive bidding for boarding gates and landing rights thus encouraging competition among airlines, and it also might encourage...
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...Airline industry Indian Airline Industry Management Economics P a ge |1 Airline industry A Project report on INDIAN AIRLINE INDUSTRY Submitted on 13Oct2012 in partial fulfillment for the requirement of the subject "Managerial Economics” during academic course of PGDM-Executive 2012-13. Submitted by Abhas Desai(06) Bharat Dalvi (05) Nitin Palve (19) Prasad Babu (10) Arjun Singh (04) Ravi Sastry (22) Vivek Misra (16) Guide: Prof. J Bhargavi K.J.Somaiya Institute of Management studies and research Mumbai Management Economics P a ge |2 Airline industry Industry Outlook: Global Positioning Airlines Industry analysis : Management Economics P a ge |3 Airline industry • • • • Economic growth environment is weak Industry profitability not perfectly but closely correlated High fuel price no problem when growth is strong But growth now close to point where profit turns to loss Management Economics P a ge |4 Airline industry • • • • Price of jet fuel persistently high In 2008 spiked higher but just 7 months Jet fuel price >$120/b for past 15 months Even after recent fall still higher than early 2011 Given difficult environment cash flow performance to date good at around 10% of revenues, except Europe (1/2 that) Financial market signal more or less consistent with change in cash flows since 2009 Management Economics P a ge |5 Airline industry • • • Demand for air travel expanding well above trend...
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...Distinguish between the terms "rates" and "price" as relates to transportation? ANS: A rate, appropriate to the regulation of transportation, refers to the amount that can be found in a Rate Tariff Book as payment to a carrier for performing a given transportation service, and is the lawful charge for the service. Under deregulation, price is a more appropriate term applying to what transportation carriers charge for their services; price representing the value of services performed based on prevailing market forces. 2. The theory of contestable markets is offered to identify the relevant market structure for the deregulated transportation environment. Explain the theory. ANS: Explanation is offered for the case of airline deregulation. For deregulation to work, its market structure must closely resemble pure competition. The airline industry appeared to be oligopolistic and would prevent new entrants. Some consensus did exist that the airline industry could perform competitively. This provides the rationale for the theory, which proposes that potential competition be substituted for the active participation of many sellers. For the theory to work, four conditions have to be met: no barrier to market entry, no economics of scale, consumers would be willing to switch quickly among carriers, and existing carriers had to be prevented from responding to new entrants' lower prices. 3. Define and discuss Cost of Service Pricing. ANS:...
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...Price Discrimination Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price. Although the term "discrimination" has negative (e.g. racist, sexist) connotations, the literal meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very...
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...aims to prevent dominance of any one company, was first proposed in 1994. But its pace was slow until 6 years later because of pressure from big state-owned companies and multinationals that had just started doing business in China. It wasn't until 2001, when China joined the World Trade Organization, did the process accelerate. In August 2007, the law was finally passed by the National People's Congress. Although the measure compromised with state-owned enterprises, which dominate industry, people tend to believe it will make way for free market competition against monopolies. It's gained a lot of praise and set a milestone in China's legal history. In our daily life, we can face several kinds of monopolistic practice, for example, if your grocery store sells you a bag of tea with the condition that you buy a pound of sugar that would be a tie-in sale. In this paper, first, I will show the detail in the China competition law, then I will specific the monopolistic practice in Price discrimination which I think we usually face most in our society, and in the last part will be the impact of the Anti-monopoly law. China competition law On 30 August 2007, after more than a decade of legislative efforts, the Standing Committee of the National People’s Congress (NPC), completed its third official reading of the draft Anti-monopoly Law (AML) and formally adopted it as the country’s first comprehensive competition law. Scope of Law The draft is stated to apply to domestic...
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...Airline Ticket Pricing The basis of airlines competition for passengers and a larger share of the market are based on: i. Frequency of service and departure schedule on each route served ii. Price charged, relative to other airlines, to the extent that regulation allows for price competition iii. Quality of service and products offered ‐‐airport and in‐flight service amenities and/or restrictions on discount fare products Passengers on the other hand choose combination of prices, flight schedules and product quality that will maximize the utility of taking a flight. Therefore, it is in the interest of each passenger to have the best service for the lowest price possible on a flight that departs at the most convenient time (Peoples, 2012). Price elasticity is a measure of how responsive consumers are to price changes or consumers' price sensitivity to changes in price. From the law of Demand, we know for certain that an increase in the price of a product will always result in a decrease in the amount demanded and vice versa. That is, we know the direction of the change. Price Elasticity answers the question: When price goes up, how much does the quantity fall. Knowledge of price elasticity helps a firm to accurately forecast the impact of price changes on unit sales. Price elasticity also helps the firm determine an optimal pricing strategy to max profits. The understanding of the price elasticity of demand for a given company's services can guide the firm in...
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...STRATEGIES AND MARKET CONCENTRATION IN THE AIRLINE INDUSTRY A Dissertation by MANUEL A. HERNANDEZ GARCIA Submitted to the Office of Graduate Studies of Texas A&M University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY August 2009 Major Subject: Economics UMI Number: 3384249 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. UMI 3384249 Copyright 2009 by ProQuest LLC. All rights reserved. This edition of the work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, MI 48106-1346 NONLINEAR PRICING STRATEGIES AND MARKET CONCENTRATION IN THE AIRLINE INDUSTRY A Dissertation by MANUEL A. HERNANDEZ GARCIA Submitted to the Office of Graduate Studies of Texas A&M University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Approved by: Chair of Committee, Steven N. Wiggins Committee Members, Li Gan James Griffin Steven L. Puller Head of Department, Larry Oliver August 2009 Major Subject: Economics iii ABSTRACT Nonlinear Pricing Strategies and Market Concentration in the Airline Industry. (August 2009) Manuel A. Hernandez Garcia...
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