Demand curves and airline pricing
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Question:
Suppose an airline flying on the Charolette-Chicago route has estimated the demand curves for three different types of customers: business (no advance purchase), leisure (7 day advance purchase), and discount (14 day advance purchase) travellers. They are:
Business: P = 600-Q and MR = 600-2Q
Leisure: P = 500-2Q and MR = 500-4Q
Discount: P = 400-3Q and MR = 400-6Q
Assume there is only one class of service, hence the marginal cost of providing the service is equal for all customers and is $100. What prices will the airline charge to each of the three different segments of customers. (HINT: Set MR=MC for each class of travel)
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Solution Summary
How an airline can determine the profit maximizing price for different customers.
Solution Preview
Business: P = 600-Q and MR = 600-2Q
Setting MR = to MC
100 = 600 - 2Q
2Q = 500
Q = 250
Insert ...
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