Price Discrimination

This activity is appropriate for principles course.
Students should have prior knowledge about the types of price discrimination.
No limit on class size.
One class period would be sufficient for this activity.

Overview

This activity is about students examining how price discrimination can increase firm profits. Students explore the strategies of the major airlines to maximize profit by using price discrimination. Students will read a WSJ article prior to class and then use the article as the context to answer application questions on topics related to price discrimination.

Expected Student Learning Outcomes

Upon successful completion of this learning activity, students will be able to

- explain how firms can increase profits by price discrimination.

- analyze the effect of price discrimination on the well-being of different types of consumers

Information Given to Students

Students are required to read the WSJ article "The secret other reason basic economy is everywhere" prior to class.

Activity:

To make sure business travelers keep paying higher prices the top three airlines (Delta, United, and American) are expanding basic economy fares to all their domestic routes with several restrictions in place. Which statement best describes this action by the three major airlines?

a. Price-sensitive travelers are better off with expanded basic economy fares providing them with lower-cost seat options.

b. The airlines are attempting to extract higher fees from naïve low-fare passengers by charging for things like carrying on luggage.

c. The airlines are attempting to extract higher fees from price-insensitive passengers by making discount fliers miserable.

d. Airlines attract more price-sensitive customers with discounts without having to lower prices to high-paying passengers.

The WSJ article needs to be assigned before class. Students should have prior knowledge of elasticity, market power, and monopolyThe following follow-up questions are recommended for facilitating the debriefing conversation:
How do the basic economy fares compare with the fares of discount airlines like Spirit?How does the price elasticity of demand of discount travelers compare with that of business travelers?What makes price discrimination possible for airlines? (Re-sale is impossible in this era of heightened airline security. Airlines can devise ways to get passengers to reveal their price sensitivity by choosing different types of tickets.)To conclude the activity the instructor can discuss the Page One Economics article on competition in the skies. This article discusses airline market structure and discusses the evolution of the airline market structure.

Discount airlines such as Spirit Airlines require passengers to pay for carry-on baggage in addition to checked bags. Below is the schedule of prices for baggage. Explain how Spirit airlines is practicing second- and third-degree price discrimination.

Baggage price schedule.pdf (Acrobat (PDF) 25kB Nov1 19)

https://www.wsj.com/articles/the-secret-other-reason-basic-economy-is-everywhere-1522847683
https://www.stlouisfed.org/education/page-one-economics-classroom-edition/economics-of-flying