Answer to Question #266298 in Microeconomics for FATIMA

Question

Explain price discrimination. What are the conditions to make price discrimination effective? Provide your answers with examples from the Airline Industry.     

Answer 1

Price discrimination is a selling plan that involves charging customers different prices for the same goods or services based upon the sellers’ thoughts that they can get the buyers to agree to. The seller charges each buyer the highest price that they will pay. The customers are placed into groups based upon certain attributes and they are charged different prices each.

For a firm to practice price discrimination successfully it must possess market power, it must have ability to concede differences in demand and must be able to prevent resale of the product.

For instance, in airline industry, the customers who buy airline tickets several months earlier in advance pay less compared to those customers that will purchase the tickets at the last minute. When a particular flight demand is high, the airline raises the ticket prices in response. The airline also tend to reduce the price of tickets that are available in order to generate sales when the tickets for a certain flight are not selling well. Also, many people prefer flying home late during the weekends and therefore those flights tend to be more expensive than those flights leaving in the early mornings.