Airplane Tickets Are a Common

Airplane tickets are a common example of price discrimination. Airline pricing formulas are complicated, and subject to a wide range of different variables. Time of day, day of the week, popularity of the route, load factor booked for the flight already and the competitive dynamic of the route all impact on the different fees. There are also differences depending on the airport, where two nearby airports can have different prices on their flights. In addition, the general price strategy of the airline is also a factor in airline ticket prices.

It could even be argued that the different classes represent price discrimination given that the basic good -- transportation -- does not change. For this example, the flight in question will be a flight from LAX to Hong Kong on Cathay Pacific at the end of December, 2010. Cathay Pacific is a full-service carrier based in Hong Kong. Traditionally, the most profitable airline routes are trans-ocean routes. In part, this is because there is little land-based competition.

Driving and taking trains are both impossible, and there is almost no scheduled boat service over the oceans. For all intents and purposes, getting from Los Angeles to Hong Kong requires a flight. The market for airline flights is also impacted by the competition on a given route. Many airlines based on both North America and Asia can facilitate flights between Los Angeles and Hong Kong. Some airlines will route passengers through other West Coast airports; Asian airlines may route through other Asian destinations.

The reason most trips will change planes elsewhere is because landing rights at airports are limited. A third-party carrier, for example Air Canada, can only fly passengers between LA and Hong Kong via a Canadian city; likewise JAL can only route passengers through Tokyo. Cathay Pacific, the Hong Kong airline, is the only carrier that flies directly between LA and Hong Kong. None of the major American carriers flies this route directly, although United can route passengers through San Francisco.

The prices for a flight in late December 2010 from LAX to Hong Kong are as follows: Economy Class: $1,200 USD Business Class: $6,000 USD First Class: $16,500 USD Prices for flights leaving now would be: Economy Class: 1600 USD one way, 2000 USD round trip Business Class: 7750 USD one way, 9600 USD round trip First Class: 9000 USD for 1 way 16500 USD for round trip These figures indicate that there is some price discrimination on this trip. The first level of price discrimination is between the three different classes of ticket.

There is value-added on business class and first class tickets in terms of superior service, as those classes receive better food and entertainment options. Because passengers in those classes also receive larger seats, there is also some opportunity cost associated with those seats. There are simply fewer paying fares per square meter in those classes as a result of the larger seats. So to some extent, the price discrimination reflects both service and opportunity cost.

However, the additional cost of serving these passengers is not as great as the differential in the ticket prices. In addition, there is price discrimination in terms of when the ticket is purchased. Economy class and business class tickets cost more when purchased closer to the flight date. This reflects that buyers purchasing at the last minute are less likely to be price sensitive than buyers purchasing well in advance. Advance purchasers tend to be vacationers, who have a higher price elasticity of demand.

Last minute purchasers tend to have low price elasticity of demand, as they need the ticket urgently. The additional cost of serving last minute passengers is unlikely to be significant, if there is any at all. As a result, this change in prices reflects price discrimination. There is no opportunity for arbitrage in this system. Airline security is tight, and as a result there is no secondary market for airplane tickets. Tickets are non-transferable, and a third party would be barred from boarding the flight.

The formal arbitrage market lies with ticket consolidators such as Expedia and Travelocity that purchase blocks of tickets early on discount, then resell them later to consumers. Airline ticket price discrimination is a form of indirect discrimination. The customers are not discriminated on the basis of any.