Price Discrimination in the Airline Industry

Abstract

In the past 10 to 15 years we have seen the emergence of low cost, "no frills" airlines competing directly with traditional carriers. This increase in competition coupled with the growing use of the internet has significantly increased price transparency within the airline industry. The primary aim of this study is to determine if and how price transparency has altered the way airlines price discriminate. The first part of this paper contains a general review of price discrimination within the airline industry. It outlines several pricing strategies adopted by airlines and considers the recent social, political and economic changes that have affected these pricing strategies. The second part contains a quantitative analysis of pricing profiles today and compares them with those existing in 2005. The results outline the emergence of two new consumer segments during this time period. "Low-low" yield consumers have emerged that place little value on time compared with other passengers. These new consumers use the internet to search for the best price and often purchase tickets a long time in advance. Airlines are increasingly using advance purchase discounts to price discriminate with these consumers. "Small-business" passengers are the other new consumer segment. The current economic downturn has put pressure on businesses to reduce costs. These passengers now opt for the cheaper, simpler service. Low cost airlines are offering more flights to suit this consumer demand. The conclusion of the study is that in general airlines have adopted the same pricing principles today as they did in 2005 but with the schedules shifted to reflect the current business environment