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Microeconomics of Airline Ticket Pricing and Price Discrimination
Last-Minute Airline Ticket Prices: A Microeconomic Perspective on Opportunity Cost and Buyer Behavior
Why do airline ticket prices skyrocket when you purchase them at the last minute when most other operations and retailers do the opposite? They sell them at a discounted price to get rid of the leftover tickets.
Using what we have learned so far in this microeconomics class, we can conclude that the buyer’s reservation price is directly linked to his or her opportunity cost at the time they are purchasing a plane ticket. When someone wants to purchase a plane ticket, they normally try to purchase it as soon as possible to make sure they get a ticket/seat and to get the cheapest price possible. When people have last-minute purchases of plane tickets, they are willing to pay a lot more than the people who have time and a lot of options for tickets and flights.
The people who are the most willing to pay the higher prices for last-minute plane tickets are also the people with the highest opportunity costs. The people who normally have higher opportunity costs are businessmen, men, and people who rely on travel for their careers. Often, airlines will offer cheaper tickets or discounts for flights when booking far in advance. This way, airlines are able to charge higher prices to the people making last-minute purchases.
Unlocking Price Discrimination: Tailoring Airline Ticket Prices to Demand Elasticity and Economic Status
Price discrimination is when firms charge different prices to different consumers for the same good. Firms, in this case, airline companies, use price discrimination to make use of the different price elasticity of demand. For example, businessmen have a very inelastic demand, which means they are willing to pay a higher price to get the plane ticket that they need. The airlines or firms can set a higher price for these consumers, and it can increase revenue and profits. Other consumers have an elastic demand, and they take advantage of cheaper prices and discounts available. The airlines benefit because they can mostly separate these consumers and reduce their consumer surplus.
Also, due to economic discrimination, there are some airlines that will charge more due to some people’s social status or the amount the consumer is usually willing to pay. Airlines are willing to charge consumers who are wealthier than those who are not as wealthy because they know that the people who are wealthier are able to pay more for better or any available seats. For consumers who are usually willing to pay less, airlines are more likely to charge less for people who usually are not as willing to pay as much as some people. Some airlines are able to determine who is able to pay for more, so they discriminate against those who are not as willing or able to pay as much.
References
- Taylor, T. (2019). Microeconomics: Principles of Economics. Cengage Learning.
- Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics (9th ed.). Pearson.
- Mankiw, N. G. (2018). Principles of Microeconomics (8th ed.). Cengage Learning.
- Krugman, P., & Wells, R. (2015). Microeconomics (4th ed.). Worth Publishers.
- Perloff, J. M. (2018). Microeconomics (8th ed.). Pearson.
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