American Carriers Have a Favorite New Pricing Trick

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

Which of the following passengers will pay the highest fare under the pricing strategy described in the news clip?

a) A family of four traveling midweek.

b) A solo traveler flying out Friday and returning Sunday.

c) A couple taking a weekend trip.

d) A solo business traveler flying Tuesday to Thursday

Wrong! - Do couples and families pay higher fares than solo travelers? How does the new pricing strategy affect a solo traveler who stays over the weekend?

Correct! - A solo traveler who doesn’t stay over the weekend pays the highest fare under the new pricing strategy.

What type of price setting does the news clip describe?

a) Price discrimination

b) Single price strategy

c) Price fixing

d) Limit pricing

Wrong! - What are price fixing, limit pricing, and single price strategy? Do any of these correspond with the type of price setting described in the news clip?

Well Done! - A firm that price discriminates sells its goods and services at different prices to different buyers. Airlines are charging a higher fare to solo weekday travelers than to others, although the flight is the same for everyone.

Why is it profitable for American and United Airlines to charge the fares described in the news clip?

a) It lowers airlines’ costs.

b) It enables airlines to sell more than the efficient quantity of tickets.

c) It forces all travelers to pay more than they are willing to pay.

d) It enables airlines to capture consumer surplus.

Wrong! - Does selling more tickets lower airlines’ costs? Is profit maximized by selling more than the efficient quantity of tickets? Is it possible to force buyers to pay a price above their willingness to pay?

That's Right! - Business travelers, who often fly solo during the week, are willing to pay a higher fare than leisure travelers. By differentiating groups of travelers, passengers pay a fare closer to their maximum willingness to pay, and airlines capture consumer surplus.

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