PRICING CONSIDERATIONS AND APPROACHES
Elasticity of Demand
Airline tickets are a price-driven market for most customers. Many will trade off non-stop flights, preferred travel times, and choice of airline to get the lowest possible price. Therefore, airlines offer advance purchase discounts to make sure they fill as many seats as possible. Demand tends to be very elastic, as evidenced by the heavy reservation activity that takes place during fare wars. Notable exceptions include first class travelers and business travelers. First class travelers are easily segmented–they get a better seat; but business travelers often sit in coach. Ever wonder why you get a cheaper fare when you have a Saturday night stay? It’s because the business traveler is willing to pay a premium to fly out and return home in the same workweek. Vacation travelers by contrast are willing to spend Saturday night. In this exercise we are going to plan a flight online in order to observe the price elasticity in this industry.
Expedia is a comprehensive travel site developed by Microsoft and then spun off as a separate company. The site allows consumers to book flights, reserve hotel rooms and rent cars online. Sign onto the Expedia Web site at www.expedia.com. Register a new account; it’s free. Then price a round-trip flight from New York (any airport) to Paris (any airport) traveling coach class, departing tomorrow, and returning one day after you arrive. Record Expedia’s response in the table below. Then press the Search Again button and vary the criteria to complete the rest of the table:
Date you completed the table:
Class Departing Returning After Airline & Departure Flight Price
Coach Tomorrow 1 day
Coach Tomorrow 1 week
Coach Next Month 1 day
Coach Next Month 1 week
First Tomorrow 1 day
First Tomorrow 1 week
First Next Month 1 day
First Next Month 1 week
1. What can you conclude from this example about the elasticity of demand for coach fares? For first-class fares?
2. Do you think the higher price for a first class seat is justified by higher costs to the airline?
3. How do the prices differ for one day versus one week trips? How can you explain this?
4. For first class, do the prices differ for trips departing tomorrow versus next month? Why or why not?
5. What pricing approach(es) mentioned in the chapter might the airlines be using based on your research?