Airlines have something similar to a discriminating monopoly. One airline controls one flight at a specific time to a specific location. As a result, they are able to price their flight for maximum profit (within the range of their competitors, of course).
Airlines use pricing algorithms that take into account several factors including past bookings, remaining capacity, average demand for certain routes and the probability of selling more seats later. There are two types of flyers: leisure and business. Leisure tickets often initially start at high prices because people book them several months out. Airlines adjust the price according to demand and supply in order to maximize their profit. Business flights are often initially sold cheaper to fill up a minimum number of seats. As the flight date approaches, prices increase due to a decrease in elasticity of the consumer's demand. In this way, even if the seats are similar, airlines are discriminating in their pricing to reflect consumer demand.
Another way in which airlines demonstrate the principles of a discriminating monopoly is in having multiple classes such as first-class, business, and economy. The people who are willing to pay more for better amenities do and the people who are not do not.
Rather than focusing on making enough money to pay for plane maintenance, fuel, and other resources, airlines price their tickets as high as consumers are willing to pay. As a result, consumers have turned to sites such as Skiplagged which predict the lowest price a ticket will reach and notify the consumer when that price is reached.
Sources:
https://www.investopedia.com/terms/d/discriminating-monopoly.asp
https://www.cnbc.com/2018/08/03/how-do-airlines-price-seat-tickets.html
I think this is really interesting. Another part of the economics of flights is that airlines make an overwhelming majority of their money from first class seats. Despite their being around 4 times the amount of economy seat the discrepancy in prices between first class and economy results in first class making the airlines more money. I also find it interesting how they change prices with elasticity of demand.
ReplyDeleteThis concept on how airlines price flights is smart because it allows them to make more of a profit. This pricing strategy shows that the airlines truly understand the customers patterns and trends. The airlines can make a lot of money for up charging on tickets when they know people have to travel. For example: around the holidays flights are at an elevated price because they have a large demand for flights. They also know that people are willing to pay a lot more for flights so they price them accordingly. This also allows them make bargain offers to attract customers.
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