Price Discrimination Practices of Airlines

Week 2: Competitive Market - Supply and Demand Variables

One variable that affects the supply curve is the price of goods. For example, if the cost of raw materials like steel goes up, it raises costs of production, which in turn causes suppliers to produce less at the same price. This has a knock-on affect of moving the supply curve to the left, in terms of reducing the overall supply.

A variable that affects the demand curve is consumer income. For example, if the incomes of people goes up they have more purchasing power, which can cause demand for goods like electronics or food to go up. This puts pressure on the demand curve to shift to the right, which then results in a higher equilibrium price and quantity.

An example of a product with changing demand and supply is gasoline, which most people use almost daily to get to and from work or school or other places. If geopolitical issues like war or embargoes cause oil production cuts, the supply of gasoline decreases due to higher production costs. This moves the supply curve to the left. The price of gas rises. On the demand side, a public shift towards electric vehicles (EVs) can have the opposite effect: the reduction in demand would move the demand curve to the right. The industry might then decide to pump less oil in order to inflate prices to keep revenue high where they want it.

WEEK 3: Price Discrimination

Price discrimination happens when companies charge different prices for the same product based on factors like age, time, place, or purchase date. The main reason a business does this is simply to maximize profit. They will charge customers more if those customers are more willing to pay more (for example, last-minute airline travelers) and they will charge others less (like early bookers or people looking for last-minute deals from cruise lines who want to fill rooms). This is how companies obtain consumer surplus.

For example, movie theaters give senior and military discounts, student and children discounts, too, but will charge regular prices for adults (although there is usually a lower price for matinee times, as well). This practice lets theaters try to fill more seats and increase revenue by appealing to groups who have a lower willingness to pay.

Airlines use price discrimination by charging more for last-minute flights and less for early bookings. This lets them fill planes early while also maximizing revenue from business travelers with immediate needs.

These examples show that businesses will use price discrimination to their advantage. They try to segment the market, attract more customers, increase overall profitability, and appeal to groups who might otherwise stay out of the market?.

WEEK 4: Utility and Price Discrimination

Diminishing marginal utility refers to the decline in satisfaction a consumer gets from consuming additional units of a good. A recent personal example from my own life is consuming Halloween candy. The first piece is always the best; you are looking forward to it, and then you have it, and you savor it, and quickly devour more. But after a few bags of candy, the satisfaction is nowhere near what it previously was, and you start to think about stopping consumption altogether. This idea could be used to explain why we pay less for bulk purchases; the expectation of extra utility from additional units is lower?.