Suppose an airline flying on the New York - 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) travelers.
Business: P = 600-Q and MR = 600-2Q;
Leisure: P = 500-2Q and MR = 500-4Q; and
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 $200. What prices will the airline charge to each of the three different segments of customers?
Airline will maximize its profit by charging each segment such that marginal revenue from the segment is equal to its marginal cost.
Price discrimination strategy can be used when it is possible to charge different prices from different customers. This strategy can increase the profits. Given problem uses this strategy. Solution to given problem depicts the steps to find optimal price and output combination for each segment of travelers.