How Airlines Use Third Degree Price Discrimination to Price their Tickets

Understanding How Airlines Use Third Degree Price Discrimination to Price their Tickets

Introduction

Have you ever wondered why airline ticket prices vary so much, even when you are travelling on the same route, at the same time, and in the same class? The answer lies in the concept of price discrimination, which airlines use to maximize their revenues. In this article, we will explore the third degree price discrimination technique, which airlines use to price their tickets, and understand how it works.

What is Third Degree Price Discrimination?

Third degree price discrimination is a pricing strategy used by companies to charge different prices to different customers based on their willingness to pay, without affecting their costs. This strategy is based on segmenting the market into different groups of customers with different levels of price sensitivity and charging them different prices. In the case of airlines, there are several factors that determine the price of a ticket including the time of year, time of day, duration of the flight, demand on the route, competition, and the customer’s willingness to pay.

How Do Airlines Use Third Degree Price Discrimination?

Airlines use different pricing strategies to cater to the needs of different customers and to maximize their profits. They use market research and data analytics to understand customer behavior and preferences, and then segment the market into different groups based on the factors mentioned above. For instance, business travelers who book last minute, have a high willingness to pay, and fly during peak hours are charged higher prices compared to leisure travelers who book in advance, have a low willingness to pay, and fly during off-peak hours.

Examples of Third Degree Price Discrimination in Airlines

Airlines use several techniques to implement third degree price discrimination such as:

Seasonal Pricing:

Airlines charge different prices for the same route based on the time of the year. For example, during peak tourist seasons, airlines charge higher prices for tickets to popular destinations as the demand is high.

Class of Service:

Airlines charge different prices for different classes of service. For example, business class tickets are priced higher than economy class tickets as they offer more comfort and luxury.

Time of Day:

Airlines charge different prices for flights departing at certain times of the day. This is known as peak and off-peak pricing. For example, flights that depart during peak hours, such as early morning or late night, are charged higher prices than flights that depart during off-peak hours.

Loyalty Programs:

Airlines use loyalty programs to incentivize frequent flyers and retain their business. Members of the loyalty program receive discounts, upgrades, and other perks that are not available to other customers.

Conclusion

Third degree price discrimination is a common pricing strategy used by airlines to maximize their profits. By segmenting the market into different groups of customers with different levels of price sensitivity, airlines are able to charge higher prices to customers who have a higher willingness to pay. This helps airlines to optimize their revenue without affecting their costs. Understanding how airlines use third degree price discrimination can help you to make better-informed decisions while booking your next flight.