Samuel Jones
Diana De Cotiis
TJ Gatsi
Pop Devahastin
Mike St. Laurent
Pascal Courty
Economics 205
25 November 2011
Analysis of a Firm’s Pricing Policy: Comparing the Harbour Air and Helijet
Vancouver – Victoria Route
Pricing policies are different ways of setting prices based on the market. These
polices include uniform pricing, indirect segment discrimination, direct segment
discrimination, and complete price discrimination. Looking at Helijet and Harbour Air
prices, of the Vancouver-Victoria route, one can determine the pricing policies set in
place to maximize profit. Maximized profit is where marginal cost equals marginal
revenue; however, most managers do not have the necessary information about
marginal revenue. Instead, managers must use the price elasticity of demand to
determine a profit-maximizing price. This is calculated where the incremental margin
percentage equals the reciprocal of the absolute value of the price elasticity of demand.
To look deeper into these firms to analyze their pricing policy, we’ll discuss how the
pricing policies segment the market, how the consumers respond to the pricing policies,
why the policies are more likely to increase revenue (relative to uniform pricing) and
how these polices can be improved upon.
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The pricing policies of Harbour Air and Helijet segment the market in different
ways. Pricing factors are taken into account when setting a pricing policy which can
segment a market. A segment is an important unified group of buyers within a larger
market. Segments are a key aspect in merchandising and positioning of what is being
sold to guarantee maximized sales at the established price point. Harbour Air’s pricing
policy is subject to market segmentation according to fares differentiating based on age.
For the Vancouver – Victoria route, fares start at $75.87 for a one way trip and can go
up to $303.46 for a two-way trip depending on the customer’s age. On the other hand,
Helijet prices vary according to class type. For example, a “Full Economy One Way – Y
Class” ticket is $245.00, whereas a “Seniors/Children One way – YCD/YCH Class” ticket is
$194. Since these companies’ pricing policies vary according to factors such as age
restrictions and memberships, the particular market is segmented. This causes the
market to have different levels of competition according to buyers’ age and willingness
to pay. Since fares vary between each company, customers have a choice for which
flight is best suitable for their level or wealth or simply suitable for their transportation
needs. Furthermore, for the Vancouver – Victoria route, each company has a different
pricing policy which makes up a segmented market.
The pricing policies differ between Helijet and Harbour air quite drastically.
Helijet bases their fares off of what day of the week it is as well as the time of the day.
During peak times customers pay up to $259.00 to take the flight whereas it only costs
$149.00 for customers on weekends and off peak times. Their competitor Harbour Air
takes a different approach and has their fares set to the same price regardless of time of
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day. A standard Harbour Air ticket costs 151.00 dollars. Age and mass booking then
break up prices. For example seniors and children fly for a reduced price and a book of
10 tickets is also cheaper. Both flights are only 35 minutes long so during peak times
consumers are generally more likely to go for the cheaper option of Harbour Air.
Business consumers with more money to spend are likely to choose Helijet for the
increased comfort and smaller travel sizes. A customer may also be more likely to travel
Helijet on off peak times because it costs the same as it would to fly Harbour Air but has
more benefits.
Both Helijet and Harbour air effectively implement an indirect price
discrimination policy. Consumers are offered a range of structured options like bulk
discounts, pre-booking, student-standby, and other choices pertaining to flight service.
What this policy achieves is an increase in the potential for the firms to earn different
incremental profit margins from different consumer segments (students, vacationers,
business travelers). Ideally, these different consumer segments have different sensitivity
to quality service and gain different marginal benefit from flying from Victoria to
Vancouver and vice-versa. Business travelers are likely to be less price-conscious and
more schedule orientated, whereas as vacationers are likely to have more flexible
schedules but be more price conscious. Students and casual travelers may not consider
the flight at all unless the price is affordable in comparison with alternative forms of
travel e.g. BC ferries. Therefore, charging a uniform price for the flight service would
give no opportunity for potential gains from consumer surplus. It would also result in a
substantial loss in the overall market demand because of a higher standard price for
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everyone. As profit-maximizing firms, they will aim to provide their service up to a point
where marginal revenue is equal marginal cost and no less. Therefore, with the
application of indirect price discrimination, they will be able to achieve higher profits
from those customers who gain a higher marginal benefit from flying i.e. business
clients. These are the customers that they target with bundling, a method where they
deliberately restrict buyer choices. Business travelers are offered either bulk discounts
or the usual high standard price whereas other consumer segments like students are
offered other deals like student-standby. Thus the firms are able to gain more revenue
from pricing according to consumer surplus; furthermore, they may maintain their
market demand from offering alternative choices for other unknown consumer
segments
When it comes to pricing, it is the key strategic area for a firm, and large
companies typically use numerous price structures depending on region, time, and
customer. Although the pricing policy for Harbour Air and Helijet could use additional
improvements to raise profit, they have already segmented their market relatively well,
and charge each customer according to their willingness to pay at the peak flight times.
For Harbour Air, they offer various types of fares, which distinctly categorize each
customer, such as seniors, students, large groups, etc. For the Vancouver to Victoria
trip, Harbour Air sets a standard price no matter how far in advance the ticket is bought.
To increase profit, they could raise the price if for flights being booked on the day-of, for
the reason that these customers usually have an inelastic willingness to pay. For Helijet,
they do not have a standard price and by booking earlier, customers have options to
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choose cheaper flights. Having a student standby option is a beneficial strategic move as
they maximize opportunity cost and not waste a seat. To maximize profit, Helijet could
provide additional value options, where customers can buy a number of flights for a set
price that is slightly cheaper than usual fares, therefore having a guarantee of a
returning customer. They could also provide a 'tour' type deal between Vancouver and
Victoria targeting tourists, who would have a more inelastic demand for the helicopter
experience. Both Harbour Air and Helijet already have strategic pricing strategies, and
despite further adjustments, their policies already assure profit from each flight booked.
Word Count: 1,139
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Works Cited
Harbour Air : Welcome! Web. 17 Nov. 2011. <http://www.harbour-air.com/>.
Helijet - Home. Web. 17 Nov. 2011. <http://www.helijet.com/>.
Png, Ivan, and Dale E. Lehman. Managerial Economics. 3rd ed. Malden, MA:
Blackwell Pub., 2007. Print.