Rising Fares, Low-Cost Airlines

Price discrimination arises when a firm sells a good or service at more than one price because groups of customers are willing to pay different amounts. Alaska Airlines realizes that people who book closer to departure are willing to pay more, so the airline price discriminates by charging passengers different fares according to how far in advance they book tickets.

If Alaska Airlines charged all passengers the same fare, some passengers would be paying much less than they are willing to pay, and others, unwilling to pay the fare, wouldn’t book a flight. By using price discrimination, Alaska Airlines separates passengers into groups. The airline can convert some consumer surplus into profit by charging a higher fare to travelers who are willing to pay more. And Alaska Airlines can also increase profit by increasing the number of passengers by charging them a lower fare.