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Airline Price Discrimination: Business vs Leisure Travellers

Airlines practice price discrimination by charging leisure travelers and business travelers different prices. Different customers pay varying prices for essentially the same coach seat because some passengers qualify for discounts and others do not. Since the discounts are substantial in many cases, the customers who qualify for a discount pay a significantly lower airfare.

a. Which group of customers tends to pay the higher price: business travelers or leisure travelers?

b. Why would business travelers generally have a different elasticity of demand for air travel than leisure travelers? Is the more elastic market paying the lower or higher price? Is this consistent with profit maximization?

Airlines rely on an assortment of restrictions that travelers must meet to qualify for the discounted fares. In effect, these restrictions roughly sort flyers into business travelers and leisure travelers.

c. Explain how each of the following restrictions sometimes used by airlines tends to separate business and leisure travelers.
i. Advance purchase requirements, which require payment at least 14 days before departure.
ii. Weekend stay requirements, which require travelers to stay over a Saturday night before returning.
iii. Time-of-day restrictions, which disallow discounts for travel during peak times of the day.

d. In each of these cases, which group of passengers effectively pays a higher price for air travel? Is this consistent with profit maximization?

Solution Preview

>a) Which group of customers tends to pay the higher price: business travelers or leisure travelers?

Business travelers tend to pay the higher price.

> b) Why would business travelers generally have a different elasticity of demand for air travel than leisure travelers?

Business travellers travel mainly to attend meetings or conferences, whose schedules are fixed. They have little flexibility in choosing their departure and return dates and times. Leisure travelers have more flexibility. In economic terms, the demand for air travel among ...

Solution Summary

This case study uses price discrimination theory to explain why airlines effectively charge different prices to business and leisure travellers.

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