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Economics-Price Discrimination in the Airline Industry - Case Study Example

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This paper "Economics-Price Discrimination in the Airline Industry" focuses on the fact that internet technology has changed the way of doing business in both B2B and B2C transactions. The new business scenario has impacted the transparency of markets positively for the benefit of consumers. …
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Economics-Price Discrimination in the Airline Industry
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Download file to see previous pages Price discrimination has been made possible only through the internet because airline companies have been able to cut operational costs, which formed 3% to 25% share of doing business through booking agents and other means of selling tickets. By market transparency, information on product and pricing is made available to online travel companies, like Orbitz, which employ new techniques to differentiate prices by yield management, market concentration, and shift in consumer demand as a result of market transparency besides time, flexibility, different prices for same flight and such other price discrimination techniques. Airline firms apply different approaches to increase their revenues by correlating pricing decisions to the standard of transparency offered by marketing mechanism of internet technology – a significant tool of organizational strategy.
According to Stavins J, in a perfect competition scenario, firms cannot discriminate price but it is possible in a monopolistic market. A monopolist, according to economic theory, can practice pricing strategies if information on consumer preferences is available and the transaction cost of deciding more than one price is not an issue. In actual markets, these extremes don’t work; a real-life market is neither perfectly competitive nor monopolistic, it lies somewhere in between the two footpaths of the road. The big question arises – how does market react? Does price discrimination increase or decrease with the increase in competition. It can be derived from the above statement that with the increase in market concentration, price discrimination also increases. Although theory states otherwise but Borenstein (1985), Holmes (1989), and Gale (1993) have predicted the increase in price discrimination with the increase in market competition (Stavins 1).
In the airline industry, whether higher market concentration increases or decreases price discrimination, can be tested through empirical analysis although it is hardly available. Some analysts have tested the price discrimination mechanisms used by airlines.  ...Download file to see next pagesRead More
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