Rising Fares, Low-Cost Airlines

EconEye Admin

4 years ago

Alaska Airlines’ Flight Pass gives subscribers who book two weeks in advance a round trip for $100—20 to 30 percent off average fares. Flight Pass Pro allows subscribers to book anytime for $400 per round trip.—nytimes.com

Answer the following questions to check your understanding of the story.

1) How does Alaska Airlines price discriminate?

Alaska Airlines price discriminates by ______________.

a) charging all its passengers the same fare

b) separating passengers according to how far in advance they book tickets

c) matching its fares to the fares of its competitors

d) separating passengers according to the cost the airline incurs to serve them

Under what situation can Alaska Airlines price discriminate? How does it accomplish this?

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.

2) How does price discrimination allow Alaska Airlines to increase its profit?

Alaska Airlines increases its profit when it uses price discrimination because it ______________.

a) sells the same number of tickets as a single-price monopoly

b) converts all consumer surplus into economic profit, and sells the efficient number of tickets

c) increases demand for tickets

d) converts some consumer surplus into economic profit, and increases the number of passengers

When Alaska Airlines price discriminates, how does the price paid by passengers compare to their willingness to pay? How does this influence consumer surplus? Does Alaska Airlines sell more 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.

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