Introduction
Third degree price Discrimination entails charging prices differently in various market segments for similar services or products. In other words the theory of third degree price discrimination has a direct link to the overall ability and willingness for the consumers to pay for a particular service or goods. Under third degree price discrimination the cost of production have limited relationship with the total price charged on the customers for a particular service (Czerny and Zhang,2015).
From the graph below, price (Pa) is charged in the peak market and production takes place at a point where MRa = MC (Berry and Jia, 2010).
Also, price Pb is charged in the off the peak market and production takes place at a point where MRb = MC. It is important to note that a relatively high price level (Pa) is charged on consumers that are inelastic in demand and those are elastic in demand are charged Pb due to the high level of responsiveness.
Figure1 explaining third degree price discrimination (Berry and Jia, 2010).
How airlines actually practice price discrimination
In the airline industry, it is very clear that individuals that engage in the booking of tickets which are without a weekend stay and near the travel date incur higher prices when compared to others. This is due to the low elasticity of demand and schedules which are inflexible. Lower fares are charged on customers who book tickets in advance due to high elastic demand (Basso et al,2009).
The new Distribution capability was one of the new booking system for air tickets takes a vast or large information prices on the profiles of customers or individuals in search for fares on comparison sites for price prior carrying out any booking. The airlines are interested in offering various options for pricing to customer’s pr passengers in wide seats and in flight movies. Option details like frequent flyer participation, leisure trip, business trip, travel history, age, nationality, marital status, shopping history and others are some of the options enshrined in the booking seats (Bilotkach and Rupp,2012).
Airlines rely on detailed profiling to practice third degree price discrimination through charging different customers for same routes but different fares. In other words where a customer is interested on special meals, a particular seat any other facility, is made to spend additional capital or money (Czerny and Zhang,2015).
Hypothesis
Business passengers have a less price elasticity of demand and exhibit a higher time valuation when compared to leisure passengers (Bilotkach et al,2010).
Table showing the itineraries and fares for Delta Airlines New York, NY (JFK) –>Charleston, SC (CHS) and JetBlue Airways New York, NY (JFK) –> Charleston, SC (CHS)
Delta Airlines New York, NY (JFK) –>Charleston, SC (CHS)
| One day | Fare = $402.40 | Return 9/12/17 at 11:13 am | Depart 9/5/17 at 8:15 am |
| One week | Fare = $372.40 | Return 9/18/17 at 11:13 am | Depart 9/11/17 at 8:15 am |
| Two weeks | Fare = $282.40 | Return 9/25/17 at 11:13 am | Depart 9/18/17 at 8:15 am |
| Four weeks | Fare = $455.40 | Return 10/9/17 at 11:00 am | Depart 10/2/17 at 8:00 am |
JetBlue Airways New York, NY (JFK) –> Charleston, SC (CHS)
| One day | Fare = $402.40 | Return 9/12/17 at 10:20 am7:38am | Depart 9/5/17 at |
| One week | Fare = $329.40 | Return 9/18/17 at 10:20 am | Depart 9/11/17 at 7:25 am |
| Two weeks | Fare = $305.40 | Return 9/25/17 at 10:20 am | Depart 9/18/17 at 7:25 am |
| Four weeksAm | Fare = $410.40 | Return 10/9/17 at 10:20 am | Depart 10/2/17 at 7:25 am |
Discussion
From the data available, it is clear that the two airlines practice third degree price discrimination where by different customers are charged different prices depending on specific criteria like whether there travelling for business or for leisure. It is clear when compared to leisure passengers, Business passengers in most cases engage in late flight booking. Booking of flights late gives room to the airlines to use advance purchase rebates to engage in third degree price discrimination between leisure passengers and Business passengers. Due to the limitations in capacity passengers usually experience delays and at the same time pay for a ticket. Congestion costs and ticket costs form part of the full fares charged (Alderighi et al,2015).
Conclusion
Conclusively, third degree price discrimination is undertaken basing on specific criteria in order to be able to obtain profits from the market basing on its underlying characteristics. When carrying out price degree discrimination, the elasticity of demand of different passengers is put into considerations. Passengers with a high elastic demand are charged lower price due to their high levels of sensitivity in demand while customers with inelastic demand are charged higher prices. In this case passengers sensitive to price are made to pay less than others.
References
Alderighi, M.,Nicolini.M., and Piga,C. (2015). Combined effects of load factors and booking time on fares: Insights from the yield management of a low-cost airline. The Review of Economics and Statistics, 97, pp. 900-915.
Basso, L.J., M.T. Clements, and Ross,W.(2009). Moral hazard and customer loyalty programs. American Economic Journal: Microeconomics, 1, pp. 101-123.
Berry, S. and Jia,P.( 2010). Tracing the woes: An empirical analysis of the airline industry. American Economic Journal: Microeconomics, 2, pp. 1-43.
Bilotkach, V., Gorodnichenko,Y., and Talavera,O. (2010). Are airlines price-setting strategies different?. Journal of Air Transport Management, 16, pp. 1-6.
Bilotkach, V. and Rupp.N.(2012). A guide to booking airline tickets online. In Advances in Airline Economics: Pricing Behavior and Non-Price Characteristics in the Airline Industry, Vol. 3, ed. James Peoples.
Czerny, A.I. and Zhang.A.(2015). Third-degree price discrimination in the presence of congestion externality. Canadian Journal of Economics, 48, pp. 1430-1455.
