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Wednesday, October 23, 2019
Price Discrimination Revised Essay
Jane, thinking that a vacation in San Francisco to visit her parents would provide her with a much-needed rest, bought a ticket two weeks in advance for a weekend flight. She would be sitting in 11A. On the day before Jane’s flight, Freya gets a call from her boss, instructing her to attend the company’s meeting in San Francisco. She booked a flight for the next day immediately upon getting the call. Freya sat in 11B            Freya paid $500 more than Jane for basically the same service, occupying adjacent seats. And this is a prime example of price discrimination. * * *            Price discrimination is simply the charging of different prices to different customers (Stavins, 1996, p. 3). It is characterized as price discrimination when the difference in prices are not due to difference in costs.            Scott Woolley writing for Forbes.Com simplified it further, saying that price discrimination is when an airline charge some customers more than other customers for the same (or almost the same) thing (Woolley, 1998.)            Tricia Ellis-Christensen stated that price discrimination is a widespread practice, and it doesn’t â€Å"necessarily imply negative discrimination.†           Price discrimination is categorized into degrees depending on the market segmentation, the customer’s ability to pay or demand elasiticity. (Ellis-Christensen, undated).            First-degree price discrimination occurs when identical goods are sold at different prices. This is most evident in the sale of both new and used cars wherein the salesperson gauges the maximum price at which the car can be sold. This type often includes bargaining, or negotiating for a lower price (Ellis-Christensen, undated).            Second-degree price discrimination is when lower prices are charged for bulk or higher quantities (Ellis-Christensen, undated).            Third degree price discrimination requires understanding the market, and is more prevalent. This type often plays on segments of the target market. An example is discounts offered to students. (Ellis-Christensen, undated).            Conditions for Price Discrimination. Joanna Stavins further explains that for an airline or company to successfully discriminate on price, it must have some market power, to be able to charge prices above the marginal cost. Typically it has monopolized that business. Another condition is the heterogeneousity of its consumers. Lastly, product resale should be costly and impossible, to prevent arbitrage. (Stavins, 1996, p. 3)            Stavins also explained that the â€Å"monopolistically competitive: conditions in air transportation business allows for price discrimination. (Stavins, 1996, p. 3)            Stavins stated that airlines differentiate between each other by offering different flight schedules and routes. Stavins also wrote that airlines attach various restrictions to cheaper tickets, making them more unattractive to consumers who give more importance to time and convenience. Meaning, a business traveler wouldn’t mind paying more to ensure that he arrives on time, as opposed to a passenger on a budget.            Advantages.  In some cases, price discrimination can implement efficient prices (Armstrong, 2006 p. 6). Arvind Sahay writes that pricing products differently can increase revneues and profits by 8% and 25% (Sahay, 2007, p. 54).            Price discrimination also opens markets, as in offering one’s goods at a high value market at a certain price, while giving it at a lower price at a lower value market. (Armstrong, 2006 p. 8)   This way, a business owner can reallocate demand to more suitable times while supply is limited (Sahay, 2007, p. 54).            On a more practical level, price discrimination will enable more firms to increase revenue, which can then be used for research and development. Consumers, on the other hand, will be able to benefit from lower fares (economicshelp.org, undated).            Disadvantages. On the other hand, some consumers will end up paying higher prices. Price discrimination will also cause a decline in consumer surplus. There maybe costs associated with segmenting market. Price discrimination also opens the field for predatory pricing (economicshelp.org, undated). Price Discrimination in Airlines            The increasing use of price discrimination, in all industries, is due to the new and affordable technology that most companies can install and use. Recent studies have also shown that consumers will pay different prices if the companies use the right approach (Sahay, 2007, p. 53).            In short, these days, airlines are pulling off price discrimination easily. On a purely technical level, Airlines are able to practice the third degree of price discrimination (segmentation-based), and even to some respects, the second degree of price discrimination by employing yield management tools.            Cunningham and Brady explains that airlines have been dividing their customers into groups: government vs. business vs. leisure travellers, first or economy class, etc. With the advent of the computer and I.T., airlines have gained more ability to match fares with their customers’ demands. (Cunningham and Brady, 2001, p. 10).            Yield Management tools allows the airline to sell the right seat to the right passenger at the right time and price, basically charging various rates for the perceived service benefit (Cunningham and Brady, 2001, p. 11).            Also, yield management allows for Ramsey pricing, which involves varying the prices for fare based on demand elasticity in relation to the marginal cost. Meaning, the more sensitive the market is to its price, the closer its price will be to the marginal cost. This explains why business market fares are higher than those who are on vacation (Cunningham and Brady, 2001, p. 11).            Since it is not easy to explain various yield management techniques of airlines, it would be best to look at practical scenarios for airline companies. Empirically, here are some examples of airline price discrimination.            Joseph Turow, writing for the Washington Posts, cites an example regarding airline Web sites that offer lower fares for first-time customers (Turrow, 2005). Technology has also made it easier for businesses such as airlines to do customer profiling. Turrow (2005) and Wooley (1998) insinuates that since businesses can now use computers and databases to store more information about a customer, it can create profiles on that customers and price accordingly. Turrow cited the case when Amazon.Com came under fire for selling the same compact disc album to different customers at varying discounts. Wooley, on the other hand, says that catalogs sent to somebody who lives in a high-end neighborhood include only one price, while the another version of the catalogs featuring the same products sent to other less-glitzy neighborhoods have discount information on them. With more and more information about the customer being easily made available, the more airlines know how to push the correct buttons and learn their ability to pay, and their willingness to pay.            Airlines also give â€Å"early-bird discounts†wherein those who book early get lower prices. This type of price discrimination plays on demand inelasticity.            People who book late are usually those who needs to be on the plane, and thus would be willing to pay any price just to get to where one wants to be. (Riley, 2006). Differences in ticket pricing is most reliant on supply and demand (Devlin, 2002). Fredrik Wallenberg explains that to get an advance purchase discount, one will have to book from one to three weeks in advance. (2000, p. 7)            On the other hand, SoYouWanna.Com advises that some of the cheapest plane tickets become available at the last minute. This is due to the fact that airlines typically want to fly with a full plane. Also, airline seats are seen as a perishable product, in the event that they are not used before â€Å"expiration†it becomes worthless (Sahay, 2007, p. 55)            Other airlines also use â€Å"Saturday night stay-over†as a mechanism for price discrimination. Airlines set a higher rate for business travelers who are unwilling to spend the weekend away from home (Wallenberg, 2000).            For some, airlines often reward loyal customers with a lower price on premium tickets if they’ve reached a certain number of mile on their frequent-fliers programs. Keith Devlin said that he was able to buy a round trip ticket from San Francisco to Milan for a bargain price of $1000. Devlin upgraded it to business class at no cost. Devlin got the bargain beceause he has earned enough miles on United’s Mileage Plus. Devlin adds that a colleague who will be on the same flight at the same time, was not able to upgrade (Devlin, 2002).            US Airways has the EZ Savers Club, which is actually an automated mailing list where subscribers can get mails detailing reduced rates on specified travel dates (Bringing market discipline†¦, 1998).            Other programs are age-dependent. Students and seniors typically get a discount on airlines.            Another form of price discrimination employed by airlines is temporary seasonal discounts for airfares that are meant to increase business. (Ellis-Christensen, undated).            Airlines have a big market with a large number of heterogenous customers, the more disparate their customers are and their behaviors, the more willing their customers would be to pay different prices (Sahay, 2007, p. 56).            Is Price Discrimination Illegal? Price discrimination may be illegal in some cases.            However, for it to be deemed illegal, it has to be seen in light of anti-competitiveness. Carl Person said that the Robinson-Patman Act protects victims of unlawful price discrimination. Persons provided the following example where in a retail store purchases the same thing from the same supplier for a much higher price. The store who bought the merchandise at a higher price would be unable to compete on price and usually loses business to its competitor (Persons, 1997).            The Federal Trade Commission clarifies that price discrimination may be used as a â€Å"predatory pricing tactic†to harm competition at the supplier’s level (Federal Trade Commission, undated).            This whole scenario doesn’t apply to airline tickets. Imperfect Information            In a perfect world or market situation, each consumer should have perfect information about the price of services and goods. However, information problems are highly ostentatious in complex and opaque markets, where there is infrequent patronage. Markets with intermediaries or those with a time lag between the time of purchase and the expected benefits are also susceptible to the problem. The airline industry is also a primary industry for imperfect information due to its complex pricing structures (Lindley, 2007, p. 74).            Imperfect information could harm a customer because it would effectively prevent him from turning to certain potential substitutes (Lande, 2007).            Moreover, some customers might not know of the existence of an option. Some customers might not even realize that best cost-saving option (Lande, 2007).            In short, as Dominic Lindley writes, the customer may not buy the cheapest or even the most appropriate product or service; may buy a service or product that does not perform as well as planned; or may be unaware of their rights and remedies if something goes wrong (Lindley, 2007, p. 74). Conclusion            It all boils down to the fact that imperfect information could hinder a customer from making a more informed decision about what he’s purchasing.            Determining the cost of an airline ticket is a complicated task. With price discrimination, it really just an interplay of demand and the customer’s ability to pay. Price discrimination allows businesses to optimize their operations for maximum benefits and income on their marginal costs. Airlines, among other businesses, are in a position to exploit that advantage because they satisfy all conditions needed for price discrimination.            For consumers and passengers to get the optimum value for their money, they must be vigilant. They must know their options, and choose accordingly. References  Armstrong, Mark. (2006). Price Discrimination. University College London. Retrieved on 3 April 2008. Brady, Stephen P. and Cunningham, William A . (2001). Exploring predatory pricing in the airline industry. Transportation Journal, 41(1), 5-15. Retrieved 21 April 2008 from ABI/INFORM Global database. (Document ID: 124411971). Bringing market discipline to pricing. (1998, January). Businessline,1. 21 Retrieved April 2008, from ProQuest Asian Business and Reference database. (Document ID: 25422269). Devlin, Keith. (2002). The crazy math of airline ticket pricing. Retrieved on 3 April 2008. Ellis-Christensen Tricia. What is Price Discrimination? Retrieved on 3 April 2008. Lande, Robert. (2007). Market Power Without A Large Market Share: The Role of Imperfect Information and other â€Å"Consumer Protection†Market Failures. Retrieved on 3 April 2008. Lindley, Dominic. (2007). Imperfect information for consumers. Consumer Policy Review, 17(3), 74-79. Retrieved 21 April 2008, from ABI/INFORM Global database. (Document ID: 1328552571). Persons, Carl E. (1997). Do You Have an RPA Price Discrimination Claim? Retrieved on 3 April Riley, Geoff. (2006) Price Discrimination. Eton College. Retrieved on 3 April 2008. Stavins, Joanna. (1996). Price Discrimination in the Airline Market: The Effect of Market Concentration. Federal Reserve Bank of Boston. Retrieved on 3 April 2008. SOYOUWANNA FIND A CHEAP PLANE TICKET? Retrieved on 3 April 2008. Sahay, Arvind. (2007). How Dynamic Pricing Leads to Higher Profits. MIT Sloan Management Review, 48(4), 53. Retrieved 21 April 2008, from ABI/INFORM Global database. (Document ID: 1360146151). Turow, Joseph. (2005). Have they got a deal for you. Washington Post. Retrieved on 3 April Wallenberg, Fredrik. (2000). A study of airline pricing. School of Information Management & Systems, University of California at Berkeley. Retrieved on 3 April 2008. Wooley, Scott. (1998). Mine was cheaper! Forbes.Com. Retrieved on 3 April 2008.
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