Price Discrimination Revised Essay

Jane, thinking that a vacation in San Francisco to visit her p arnts would provide her with a much-needed rest, bought a rag two weeks in advance for a weekend flight. She would be sitting in 11A. On the day before Janes flight, Freya receives a call from her boss, instructing her to attend the companys meeting in San Francisco. She book a flight for the next day immediately upon beat upting the call. Freya sit down in 11B Freya paid $500 much than Jane for basically the identical do, occupying prehended seats. And this is a prime illustration of charge discrepancy.* * * toll difference is entirely the charging of different harms to different clients (Stavins, 1996, p. 3). It is characterized as price variation when the difference in prices are not collectable to difference in costs. Scott Woolley writing for Forbes.Com alter it further, saying that price secretion is when an wrinkleline charge slightly customers much than other customers for the same (or alm ost the same) thing (Woolley, 1998.) Tricia Ellis-Christensen stated that price discrepancy is a widespread formula, and it doesnt necessarily imply negative discrimination. cost discrimination is categorized into degrees depending on the trade segmentation, the customers susceptibility to give birth or demand elasiticity. (Ellis-Christensen, undated). First-degree price discrimination occurs when identical goods are sold at different prices. This is most evident in the cut-rate sale of both new and employ cars w here(predicate)in the salesperson gauges the maximum price at which the car can be sold. This type often takes bargaining, or negotiating for a lower price (Ellis-Christensen, undated). Second-degree price discrimination is when lower prices are charged for bulk or higher(prenominal) quantities (Ellis-Christensen, undated). Third degree price discrimination requires understanding the market, and is much prevalent. This type often plays on segments of the target m arket. An type is send packings offered to students. (Ellis-Christensen, undated). Conditions for bell inconsistency. Joanna Stavins further explains that for an airway or company to successfully secern on price, it must bind some market power, to be fit to charge prices above the bare(a) cost. Typically it has monopolized that business. Another condition is the heterogeneousity of its consumers. Lastly, fruit resale should be costly and impossible, to prevent arbitrage. (Stavins, 1996, p. 3) Stavins to a fault explained that the monopolistically competitive conditions in air transportation business allows for price discrimination. (Stavins, 1996, p. 3) Stavins stated that airline businesss differentiate amid to each bingle other by offering different flight schedules and routes. Stavins also wrote that airlines attach various restrictions to cheaper tickets, making them more than unattractive to consumers who bankrupt more enormousness to time and convenience. Mean ing, a business traveler wouldnt mind give more to ensure that he arrives on time, as opposed to a rider on a budget. Advantages. In some cases, price discrimination can implement efficient prices (Armstrong, 2006 p. 6). Arvind Sahay writes that pricing products differently can increase revneues and profits by 8% and 25% (Sahay, 2007, p. 54). scathe discrimination also opens markets, as in offering ones goods at a high value market at a certain price, part giving it at a lower price at a lower value market. (Armstrong, 2006 p. 8) This way, a business owner can reapportion demand to more suitable times while supply is special (Sahay, 2007, p. 54). On a more practical level, price discrimination bequeath enable more firms to increase revenue, which can then be consumptiond for research and development. Consumers, on the other hand, will be able to take in from lower fares (economicshelp.org, undated). Disadvantages. On the other hand, some consumers will end up paying higher prices. bell discrimination will also driveway a decline in consumer surplus. There maybe costs associated with segmenting market. Price discrimination also opens the field for vulturine pricing (economicshelp.org, undated).Price Discrimination in Airlines The increasing use of price discrimination, in all industries, is due to the new and affordable technology that most companies can install and use. late studies have also shown that consumers will pay different prices if the companies use the decently approach (Sahay, 2007, p. 53). In short, these days, airlines are pulling off price discrimination easily. On a purely technical level, Airlines are able to practice the third degree of price discrimination (segmentation- ground), and even to some respects, the import degree of price discrimination by employing yield instruction tools. Cunningham and Brady explains that airlines have been dividing their customers into groups government vs. business vs. leisure travellers, firs t or economy class, etc. With the advent of the computer and I.T., airlines have gained more ability to match fares with their customers demands. (Cunningham and Brady, 2001, p. 10). endure Management tools allows the airline to sell the right seat to the right passenger at the right time and price, basically charging various rates for the sensed service benefit (Cunningham and Brady, 2001, p. 11). Also, yield management allows for Ramsey pricing, which involves varying the prices for fare based on demand elasticity in relation to the marginal cost. Meaning, the more sensitive the market is to its price, the closer its price will be to the marginal cost. This explains why business market fares are higher than those who are on vacation (Cunningham and Brady, 2001, p. 11). Since it is not easy to explain various yield management techniques of airlines, it would be best to look at practical scenarios for airline companies. Empirically, here are some examples of airline price discrim ination. Joseph Turow, writing for the Washington Posts, cites an example regarding airline Web sites that offer lower fares for first-time customers (Turrow, 2005). Technology has also do it easier for businesses such as airlines to do customer profiling. Turrow (2005) and Wooley (1998) insinuates that since businesses can now use computers and databases to store more schooling well-nigh a customer, it can bring in profiles on that customers and price accordingly.Turrow cited the case when Amazon.Com came under fire for selling the same compact disc album to different customers at varying discounts. Wooley, on the other hand, says that catalogs send to somebody who lives in a high-end neighborhood include only one price, while the another version of the catalogs featuring the same products sent to other less-glitzy neighborhoods have discount information on them. With more and more information about the customer being easily made available, the more airlines know how to push the correct buttons and learn their ability to pay, and their willingness to pay. Airlines also give early-bird discounts wherein those who book early get lower prices. This type of price discrimination plays on demand inelasticity. People who book late are ordinarily those who needs to be on the plane, and thus would be willing to pay any price just to get to where one expects to be. (Riley, 2006). Differences in ticket pricing is most reliant on supply and demand (Devlin, 2002). Fredrik Wallenberg explains that to get an advance purchase discount, one will have to book from one to three weeks in advance. (2000, p. 7) On the other hand, SoYouWanna.Com advises that some of the cheapest plane tickets give-up the ghost available at the last minute. This is due to the fact that airlines typically want to fly with a full plane. Also, airline seats are seen as a perishable product, in the event that they are not apply before expiration it becomes worthless (Sahay, 2007, p. 55) Other air lines also use Saturday nighttime stay-over as a mechanism for price discrimination. Airlines set a higher rate for business travelers who are unwilling to spend the weekend absent from home (Wallenberg, 2000). For some, airlines often reward loyal customers with a lower price on premium tickets if theyve reached a certain number of mile on their frequent-fliers programs. Keith Devlin said that he was able to buy a round pilgrimage ticket from San Francisco to Milan for a bargain price of $1000. Devlin kick upstairsd it to business class at no cost. Devlin got the bargain beceause he has earned enough miles on linkeds Mileage Plus. Devlin adds that a colleague who will be on the same flight at the same time, was not able to upgrade (Devlin, 2002). US Airways has the EZ Savers Club, which is actually an automated mailing list where subscribers can get mails detailing reduced rates on specified travel dates (Bringing market hold back, 1998). Other programs are age-dependent. Stu dents and seniors typically get a discount on airlines. Another form of price discrimination employed by airlines is temporary seasonal discounts for airfares that are meant to increase business. (Ellis-Christensen, undated). Airlines have a expectant market with a large number of heterogenous customers, the more disparate their customers are and their behaviors, the more willing their customers would be to pay different prices (Sahay, 2007, p. 56). Is Price Discrimination Illegal? Price discrimination may be banned in some cases. However, for it to be deemed illegal, it has to be seen in light of anti-competitiveness. Carl someone said that the Robinson-Patman Act protects victims of unlawful price discrimination. Persons provided the following example where in a retail store purchases the same thing from the same provider for a much higher price. The store who bought the merchandise at a higher price would be unable to compete on price and usually loses business to its competit or (Persons, 1997). The Federal Trade Commission clarifies that price discrimination may be used as a predatory pricing tactic to harm competition at the suppliers level (Federal Trade Commission, undated). This whole scenario doesnt apply to airline tickets. progressive Information In a perfect world or market situation, each consumer should have perfect information about the price of function and goods. However, information problems are highly ostentatious in complex and solid markets, where there is infrequent patronage. trades with intermediaries or those with a time lag between the time of purchase and the expected benefits are also susceptible to the problem. The airline industry is also a primary industry for imperfect information due to its complex pricing structures (Lindley, 2007, p. 74). Imperfect information could harm a customer because it would effectively prevent him from turning to certain potential substitutes (Lande, 2007). Moreover, some customers might not kno w of the existence of an option. Some customers might not even realize that best cost-saving option (Lande, 2007). In short, as Dominic Lindley writes, the customer may not buy the cheapest or even the most abstract product or service may buy a service or product that does not perform as well as planned or may be unaware of their rights and remedies if something goes wrong (Lindley, 2007, p. 74). remainder It all boils down to the fact that imperfect information could hinder a customer from making a more informed decision about what hes purchasing. Determining the cost of an airline ticket is a complicated task. With price discrimination, it really just an interplay of demand and the customers ability to pay. Price discrimination allows businesses to optimize their operations for maximum benefits and income on their marginal costs. Airlines, among other businesses, are in a position to tapdance that advantage because they satisfy all conditions needed for price discrimination. For consumers and passengers to get the optimal value for their money, they must be vigilant. They must know their options, and choose accordingly.ReferencesArmstrong, Mark. (2006). Price Discrimination. University College London. Retrieved on 3April 2008. Brady, Stephen P. and Cunningham, William A . (2001). Exploring predatory pricing in theairline industry. Transportation Journal, 41(1), 5-15. Retrieved 21 April 2008 from ABI/INFORM spherical database. (Document ID 124411971).Bringing market discipline to pricing. (1998, January). Businessline,1. 21 Retrieved April 2008,from ProQuest Asian Business and Reference database. (Document ID 25422269).Devlin, Keith. (2002). The crazy math of airline ticket pricing.Retrieved on 3 April 2008. Ellis-Christensen Tricia. What is Price Discrimination?Retrieved on 3 April 2008. Lande, Robert. (2007). Market Power Without A Large Market Share The routine of ImperfectInformation and other Consumer Protection Market Failures. Retrieved on 3 April 2008. Lindley, Dominic. (2007). Imperfect information for consumers. Consumer Policy Review, 17(3),74-79. Retrieved 21 April 2008, from ABI/INFORM Global database. (Document ID 1328552571).Persons, Carl E. (1997). Do You Have an RPA Price Discrimination Claim? Retrieved on 3 AprilRiley, Geoff. (2006) Price Discrimination. Eton College. Retrieved on 3 April 2008.Stavins, Joanna. (1996). Price Discrimination in the Airline Market The Effect of Market Concentration.Federal Reserve Bank of Boston. Retrieved on 3 April 2008.SOYOUWANNA FIND A CHEAP PLANE TICKET? Retrieved on 3 April 2008.Sahay, Arvind. (2007). How Dynamic Pricing Leads to Higher Profits. MIT Sloan ManagementReview, 48(4), 53. Retrieved 21 April 2008, from ABI/INFORM Global database. (Document ID 1360146151).Turow, Joseph. (2005). Have they got a deal for you. Washington Post. Retrieved on 3 AprilWallenberg, Fredrik. (2000). A study of airline pricing. School of Information Management &Systems, University of California at Berkeley. Retrieved on 3 April 2008. Wooley, Scott. (1998). Mine was cheaper Forbes.Com. Retrieved on 3 April 2008.