Airline Prices and O-D Markets
Chapter 4
Section 4.1
Samira Monshi
Lists of Learning Objective
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•
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Introduction
Regulated vs. Liberalized Pricing
Theoretical Pricing Strategies
Price Discrimination vs. Product
Differentiation
• Review of topics
Introduction
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Pricing
Revenue management
O-D Market or Flight Leg?
Three factors that determine the airfares for
an O-D Market :
– Volume and characteristics of the O-D market demand for travel
between A and C (e.g., trip purpose and price elasticity of demand)
– Nature of airline supply between A and C (frequency and path quality
of flights)
– Competitive characteristics in that market (number and type of airline
competitors).
Regulated vs. Liberalized Pricing
Theoretical Pricing Strategies
• Cost-based pricing (marginal cost pricing)
– In this pricing principle producer sets its prices equal to the
marginal cost of producing an incremental unit of output.
– An alternative approach to cost-based pricing is that of
average-cost pricing.
• Demand-based pricing
– It is based on consumers’ “willingness to pay,” as defined
by the price–demand curve in each O-D market.
• Service-based pricing
– It is based on differences in the quality of services (and, in
turn, in the cost of providing these services) as a basis for
pricing.
Price Discrimination vs. Product Differentiation
• Price discrimination
– It is the practice of charging different prices for the same
(or very similar) products that have the same costs of
production, based solely on different consumers’
“willingness to pay”.
• product differentiation
– It involves charging different prices for products with
different quality of service characteristics and therefore
different costs of production.