Sunday, December 03, 2006

Airline Pricing

When checking the return segment of flights on NWA from Minneapolis to Flint, Michigan on January 2, I found the following round trip fares:

Leaving Mpls for Flint on January 2 at:
6 a.m. $411
9 a.m. $543
10 a.m. $618
1:10 p.m. $931
1:11 p.m. $881

I guess I can somewhat understand the early morning-late morning-afternoon price differentials. Being the holiday season right after New Years Day, with a lot of non-business tourist/leisure travellers, who wants a 6 a.m. flight? Low demand, low price vs. a more leisurely time of say, 10 a.m. And you want to sleep in, relax, and get to the airport for an early afternoon departure at 1 p.m.? Well, it's going to cost you about $500 for that extra time!

What I don't understand is the $50 difference in flights that leave Mpls for Detroit only one minute apart! I think I'd book the 1:11 flight and save $50 for that extra minute, that's $3,000 an hour!

Bottom Line: Airlines are the masters of price discrimination, and they are trying to: a) charge whatever the market will bear for each seat, and b) fill the planes to capacity with passengers as often as possible (hence the overbooking strategy). As flights approach capacity, they raise the ticket prices for the remaining seats. If there are a lot of empty seats available, lower the prices until the plane is full, or at least don't raise prices.

Also, because the marginal cost of each additional passenger is zero, or close to zero, the airlines face a "pure selling problem" and just try to maximize revenue on each flight.

Puzzle remains: If airlines price discriminate, why don't movie theaters?


At 12/04/2006 6:45 AM, Blogger Tim Worstall said...

It's been tried in the UK.

Apparently it didn't work all that well.

At 12/04/2006 7:05 AM, Anonymous Anonymous said...

Movie theaters do price discriminate: Don't they?

Maybe I don't understand price discrimination. But, what's the difference between airlines charging $411 at 6 a.m. and $543 at 9 a.m. and movie theaters charging $4.50 before 5 p.m. and $8.00 after 5 p.m.? Isn't that because they have trouble filling the seats for the earlier shows and draw customers in to buy their expensive popcorn and candy?

At 12/04/2006 8:01 AM, Blogger Mark J. Perry said...

See my previous post. Movie theaters don't use price discrimination to vary prices BY movie, and have uniform pricing BY movie, i.e. blockbusters cost the SAME as unpopular movies.

At 12/04/2006 8:55 AM, Anonymous Anonymous said...

I guess I still don't understand price discrimination. My thoughts are like this:

Airline flight times = Movie show times

Therefore: Different flight times are the same as different movie times

One is price discrimination and the other is not ?

Different flight destination = Different movies.

Therefore: Different flight destinations are the same as different movies

Both are price discrimination

Why so? I guess it's just how you want to define price discrimination.

At 12/04/2006 1:07 PM, Blogger Mark J. Perry said...

Movie theaters use time-based price discrimination (afternoon prices are lower than evening), but use uniform pricing by MOVIE. If there are 10 movies showing at a theater in the evening, they are all priced uniformly at $8 per movie, even though demand is obviously higher for some movies than others. Question: Why don't theaters charge a premium for movies with high demand, and a discount for movies with low demand, i.e. use price discrimination based on movie demand.

At 12/04/2006 3:06 PM, Anonymous Anonymous said...

Maybe you are not aware of theater discounts around here.

I can't use my union discount during the most popular movies. Look in the Flint Journal where it says no passes or discounts allowed for this show. A lot of people in Flint have discounts to some of the movies, at all times of the day, but not all. I'm not sure how well-known this is.

There's many movies I go to that I recognize quite a few people who don't pay full price, too.

I always try to but something to pay the theater back for the discount. But, that's just me.

At 12/04/2006 7:32 PM, Blogger Mark J. Perry said...

From the Wash Post article: "So here's a puzzle: Why will movie theaters charge the same $9.50 to see "Casino Royale" this Saturday night that they charged to see the disappointing remake of "All the King's Men" on a Wednesday night in the middle of September?"

At 12/05/2006 7:18 AM, Anonymous Anonymous said...

That is interesting.

It's doesn't really cost them anymore to show to a full theater than it does a near empty one: Does it? And, you can't sell $5 popcorn and $5 candy bars to empty seats. Maybe they should start giving out free passes as soon as they see the movie is not a sell out.


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