I came across a useful blog post by Ben Cahill (Senior College) on the Tutor2u site. It involves the price of airfares. The New Zealand Herald found that flights originating in London were significantly cheaper than NZ deals on equivalent trips leaving Auckland.
Fares for Departing April and returning May:
London – Auckland return – booked in UK = NZ$1,620 equivalent
Auckland – London return – booked in NZ = $3,189 (difference of $1569)
Flights out of NZ can’t be booked on Air NZ’s UK website – discrimination by location (third degree discrimination). In the UK the cost of a one-way fare is similar to that of a return.
Reasons for differences:
Greater demand for flights out of Auckland to London.
Exchange rate – 2003 difference would have been $616 instead of $1569
However airline pricing is based on many considerations and is ideal for price discrimination for the following reasons:
* Airlines has some control on the price,
* Buyers have different price elasticities of demand – business travelers vs. vacation travelers (see graph below)
* Each ticket can be sold at a different price, depending on when you book, how you book, the day you book, and so on.
* Software programmes can constantly calculate the empty seats remaining and price them while maximising returns. Yet, competition eats away all those margins. Hence, the tendency to raise revenues from wherever possible.
To maximize profit, the firm sets a price for each group by equating marginal revenue and marginal cost.