price discrimination-final (purple)
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8/3/2019 Price Discrimination-Final (Purple)
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Saints of Market
MBA I “B”
Group 4
Price Discrimination:
Case of Airfare Tickets
Shishir Chaudhry (34161)
Divya Kapadia (34175)
Sinlo Kemp (34178)
Debadatta Mishra (34182)Anupam Mukherjee (34187)
Hari Om (34188)
Aniket Shah (34198)
Rahul Sharma (34200)
Rishi Sinha (34206)
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Price Discrimination
• Charging of different prices for different quantities of a
product at different times to different customers or in
different markets
• Examples : Telecom tariffs, Public utility such as gas,
electricity, airlines, hotels etc.
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Conditions to be met
• Imperfect competition
• Price elasticity of demand must differ
• Quantities, times, customers groups must
be separable
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Types of Price Discrimination• Perfect Price Discrimination or First
degree price discrimination
• Second Degree Price Discrimination
• Third Degree Price Discrimination
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Price Discrimination in the
context of Airline tickets • Customers booking early normally pay
lower prices
• Closer to the date and time of the
scheduled service, the price rises, on the
simple justification that consumer’s
demand for a flight becomes more inelastic
the nearer to the time of the service• This has led us to model a simple
scenario based on Second Degree
Price Discrimination
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How does an airline
determine the optimum
number ?• Booking limit
• Maximum no. of seats that can be booked at discount price.
Once the booking limit is reached, all future customers will
be offered the full price.
• Protection Limit • The protection level is the no. of seats that will be booked
by those customers who come in late (mainly business
people) at full price.
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Assumptions • Seats - 120 (all economy class).
• Only 2 fare rates considered (discount rate i.e. Rs. 2500
& full price i.e. Rs. 3500).
• Booking limit = 120 – the protection level.
Demands at full fare (Q) No. of days of demand Cumulative probability F(Q) =
Prob{D<= Q} 0-60 6 0.0667 61 7 0.1444 62 13 0.2889 63
12
0.4222
64 21 0.6556 65 19 0.8667
Above 65 12 1.0000 Total 90 1.0000
Historical data of airline over a 90 day period
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Calculation and
Findings• We can calculate the value of lowering the protection level from Q+1
to Q. Lowering the protection level results in selling the (Q+1)th seatat a discount which guaranteed return of 2500.
• Protecting the Q+1 seats has an expected (chance) value equal to: (1-F(Q))(3500)
• Then, we can lower the booking limit to Q as long as:
• (1-F (Q)) * 3500) <= 2500
• F (Q) >= (3500-2500)/3500
• = 0.285714
• On referring from the conditional probability table the
value of Q comes out to be 62
• Hence, Discounted no. of tickets = 120 - 62 = 58
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Other Scenarios:• Versioning -
• One can buy an expensive, flexible ticket or one can buy a cheap
ticket, with many restrictions. Since a passenger can choose
between different versions of an air ticket, it is natural to consider
the theory of versioning when analysing the price discrimination
•
Discounts to large costumers-• Another common characteristic in many national markets is that
large firms that demand airline tickets write a contract with an
airline, where the firms’ employees receives a certain discount on
each airline ticket
• Frequent flyer programs –
• Frequent flyers programs are important in the airline industry. It
implies that those who are loyal members of such a program can
earn member points for each flight and later redeem the points to
claim a free bonus flight. It can be seen as a kind of discount Also
discounts are given for round trips travel too
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Other Untouched
Scenario: Overbooking • As there is a chance of customer not showing up
for the departure, the airline routinely overbook their flights, as in this case the airline stands achance of losing revenue. The airlines determinethe optimum level of overbooking. If allcustomers turn up then the airline is forced to‘bump’ to other flights. This calculation is similar to that of above scenario.
• The optimal overbooking level balances• Lost revenue due to empty seats
• Compensation to bumped customers
• Loss of customer goodwill.