United Airlines: Economic Analysis – MBA 802 Final Exam
a) Is the demand curve for United’s products elastic or inelastic?
The demand curve for United Airlines’ services is generally elastic, particularly in the
economy class segment. This aligns with the principle of price elasticity of demand, a
concept covered in Module 5. Elastic demand implies that a percentage change in price
leads to a more than proportional change in the quantity demanded. Given United's
dynamic pricing strategy and the availability of substitutes (other airlines, travel methods),
customers in leisure travel segments are highly price-sensitive. Income elasticity is also
relatively high—especially for international travel—indicating that demand increases
substantially with rising disposable income, as per Module 3. Thus, the firm's demand curve
reflects high responsiveness to changes in both price and income.
b) How does United determine a product’s price and quantity to be as
profitable as possible?
United Airlines determines price and quantity using principles of marginal analysis (Module
4). The firm employs advanced revenue management techniques where pricing is adjusted
dynamically based on real-time demand, competition, and remaining capacity. According to
the rule MR = MC (Marginal Revenue = Marginal Cost), United maximizes profit by selling
additional units (seats) only up to the point where the revenue from the last seat equals its
marginal cost. The use of fare segmentation (basic economy, premium, business) reflects
their application of market segmentation strategies (Module 5). This also helps in capturing
consumer surplus and improving overall profitability.
c) How do disposable income and consumer spending affect the demand for
United’s products?
Disposable income and consumer spending significantly impact United Airlines’ demand.
Air travel is categorized as a normal good with high income elasticity (Module 3), meaning
demand increases as consumers' disposable income rises. In downturns, when consumer
spending contracts, United experiences a drop in leisure travel bookings, especially in the
economy segment. However, business and premium travel segments are relatively income
inelastic, remaining stable even during slowdowns. Therefore, fluctuations in disposable
income directly affect United's revenue, especially given the high marginal propensity to
consume (MPC) in the lower-income leisure segments.
d) Is there any need for laws or regulations that protect consumers’ interests
against predatory business practices?
Yes, regulatory oversight is necessary to protect consumers in the airline industry,
especially due to practices like dynamic pricing and ancillary fee bundling. As discussed in
Module 2, government intervention may correct market failures and protect against
inefficiencies caused by information asymmetry. Regulations such as the U.S. Department of
Transportation's fare transparency rules ensure that consumers are not misled by hidden
fees or discriminatory pricing. These policies act as safeguards, maintaining consumer trust
and ensuring competitive fairness—essential in markets characterized by limited
competition and complex pricing strategies.