Airline price discrimination – is this an… | tutor2u Economics

Airline price discrimination – is this an example?

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. 

One of the key factors of course is when the booking is made, with evidence showing that the highest prices paid are when it is booked last minute and when it is booked a long way in advance, the cheapest time (but not always) tending to be about six weeks before the flight. One of the things I like to do with my students is to go online and look at two different scenarios – one a flight to be booked in six weeks time and one that night, eg to visit a sick relative.  The difference in price for the same service is often high and the students are usually able to relate it to elasticity and a good discussion flows regarding whether it is fair or not. 

This all leads on to a recent article on differences in price on the Auckland – London route which is a minimum of 24 hours, depending on the length of the stopover. Having done it a few times, it is not the most pleasant way to spend a day! 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. Not many airlines were keen to comment but 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 – third degree price discrimination. 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!

In any case, perhaps some UK residents may be keen to escape the snow and enjoy the “hobbit size” deals that are not available back in New Zealand!

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