Price Discrimination in Swiss International Airlines

Published: 2019-12-04 08:30:00
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Price discrimination refers to the practice of charging different prices to different groups of consumers for a similar good or service based on the purchasing power of the consumers and their willingness to pay. Price discrimination is mainly anchored on the principle that an organization is trying to employ different kinds of price elasticity of demand (Nwabueze and Mileski 2008). Consumers who have an extremely inelastic demand exhibit willingness to pay higher prices, and if the organization sets higher prices for such consumers, it can increase its profit margin (Puller and Taylor 2012, p.800). Other groups of customers also exist with an elastic demand and tend to be more sensitive to price, thus, they are likely to respond to price discounts and special offers. Organizations can benefit if they can separate these groups of consumers partly to decrease consumer surplus. The global airline industry has also been involved in different forms of price discrimination in an attempt to keep up with the steep competition as well as increase their profits (Bachis and Piga 2006). This paper seeks to discuss ways in which the Swiss International Airlines implements the practice of price discrimination in its everyday operations.

Similar to most of the other national and flagship carriers, the Swiss Airlines takes into account the time that customers buy tickets. It is widely known that when one purchases a ticket months beforehand, it will be cheaper. If the demand for that particular flight goes up, then the carrier will increase the ticket prices of that flight (Puller and Taylor 2012, p.800-801). As such, it implies that the airline will only sell the remaining tickets to people who exhibit an inelastic demand and willing to pay higher prices. On the other hand, if the airline experiences slow purchase of tickets for a specific flight, it will have to reduce the price of those tickets. Lower prices are likely to attract more customers who are more sensitive to the prices, thereby ensuring that all the seats will be booked. Under normal market conditions, it would be in the best interest of the airline to have its fleet carry passengers who pay maximum prices and exhibit the willingness to pay (Stavins 2001, p.200-202).

The prices of the airline tickets can also change from time to time. For instance, a significant number of passengers reported having seen air tickets going for a certain fixed price. However, the following day when they returned to purchase the tickets, they established that the prices had skyrocketed (Dai and Serfes 2014, p.160). While this greatly annoys passengers, it is as a result of price discrimination practice, whereby the carrier can reserve a specific number of tickets for the economy class at a lower price to attract more customers who are sensitive to price. If the airline sees that more customers are purchasing the tickets for such a flight, it may set higher prices for the remaining tickets. In this case, the company seeks to capture the greatest consumer surplus possible.

Additionally, when implementing price discrimination practice, the company takes into account the time that most passengers travel. It charges higher prices for tickets of passengers traveling during peak times (Dai and Serfes 2014, p.160-161). For example, during the week, air tickets may be expensive because the majority of passengers traveling are mostly businesspeople. Their demand will be price inelastic since it is catered for by company expenses. Passengers with more flexibility and willingness to travel over the weekend are more sensitive to the prices and, therefore, have an elastic demand. The airline may also charge different airfares according to the season (Dai and Serfes 2014, p.161). When summer holidays hit the peak, airfares tend to be more expensive as the company charges different prices for tickets based on the season as well as the day of the week. Additionally, during Easter and August holiday seasons, the airline sets higher ticket prices because of a more inelastic and greater demand. Such a practice is called a third-degree form of price discrimination as it involves the carrier setting different ticket prices to various consumer groups such as holiday goers or peak travelers (Brueckner 2003, p.105-118). These practices are regarded as a second-degree form of price discrimination where prices vary based on quantity or quality demanded. This involves the airline charging different prices depending on the quality of services offered to passengers (Obermeyer, Evangelinos and Puschel 2013, p.31). For example, nearly all airlines, including Swiss International Airlines, often offer different classes of seats on their flights such as first class, economy class, and business class. Passengers in the first class may receive wine and beer as well as other services with their tickets, while the passengers in the economy class are only offered juice, water, and pop. First class ticket prices are more expensive than economy tickets since the company can afford to provide better services to passengers. Higher first class air tickets also consider different demand elasticity. Businesspeople paying for first class seats have a highly inelastic demand and, therefore, are willing and able to pay the higher ticket prices to receive better products or services (Obermeyer, Evangelinos and Puschel 2013, p.31). This practice involves differentiating consumers according to preference and taste, hence enabling the company to capture greater consumer surplus.

The company also tends to charge lower prices for tickets of passengers who check in during unsocial hours. Since there are some flight times, which are less attractive to passengers, the airline will have to charge lower prices (Obermeyer, Evangelinos and Puschel 2013, p.31-32). For example, when people take weekend breaks, most of them will likely prefer to return late on Sunday, and this has made a significant number of Sunday night flights more costly than early Sunday flights (Piga and Bachis 2006).

The airline also offers many ways to set different prices for the variations on the plane tickets. The company charges extra cost for seats that have more legroom. In the economy class, the company offers seats with extra legroom for a specific price, and this has gained popularity among passengers (Dominguez-Menchero, Rivera and Torres-Manzanera 2014, p.137). This practice may not be purely price discrimination since it is a somewhat a different product, although the carrier can afford to set higher prices for consumers with greater inelastic demand. Besides the extra legroom charges, the airline may go to the extreme and charge very high first-class airfares. What is more interesting is that passengers can only purchase these extra legroom seats shortly before departure. The carrier may also charge for any extras, for example, check in passenger baggage. It means that passengers who are not sensitive to prices may pay to board the plane early or pay to check in their bags (Dominguez-Menchero, Rivera and Torres-Manzanera 2014, p.137). Moreover, passengers who want to select their seat can pay a special premium. While these practices may not be strictly considered as price discrimination since the products or services are slightly different, they serve as ways through which the company extracts higher prices from passengers who are ready and able to pay more for extras.

It is also standard for leading carriers across the world to charge significantly higher ticket prices to local citizens from the country where the airline has its headquarters. In this case, price discrimination practice is mainly based on the level of consumer loyalty. When consumers have a greater customer loyalty to the airline, they are highly likely to be less sensitive to increases in the ticket prices (Dominguez-Menchero, Rivera and Torres-Manzanera 2014, p.139). Several dimensions are underlying this form of consumer loyalty. For one, the airline could have symbolic value, thus, showing loyalty among passengers would be a way of expressing national pride. There are also some advantages that come with traveling using a national carrier; for example, passengers do not necessarily have to use foreign languages to communicate, and they also served their common local meals conveniently (Dominguez-Menchero, Rivera and Torres-Manzanera 2014, p.139). These reasons may make passengers less sensitive to increases in the ticket prices and, as such, the local citizens may put up with higher prices.

Another way that the company implements price discrimination is through air miles. While air miles may not be a form of price discrimination, it serves as a means of rewarding loyal passengers (Dominguez-Menchero, Rivera and Torres-Manzanera 2014, p.139). The more times passengers travel with the carrier, the more air miles they get and, therefore, get discounts for regular flying.

The company also uses differentiated pricing often since it sells products and services to different consumer segments at the same time. The company achieves this by assigning different capacity to the booking classes sold for varying prices and linked to ticket fare restrictions (Escobari and Jindapon 2014, p.1). Such restrictions help in ensuring the market segments purchase within the booking classes range within the restrictions set. A good example can be business passengers who are sensitive to flight schedules and willing to buy high-priced tickets. These passengers cannot buy lower priced tickets since the booking class for low prices may contain a condition for a Saturday-night stopover, a two-week advance purchase, or other conditions that discourage or prevent business passengers from booking certain categories (Button, Costa and Cruz 2007, p.213-230). The same flight may have passengers who are sensitive to prices and not willing to pay higher prices, but may be ready to board lower-demand flights; for instance, one which leaves earlier or through a connection city, and are also willing to relinquish refundability (Escobari and Jindapon 2014, pp.1-2).

The dynamic price discrimination practice has existed in many service industries, including car hire, retail sales, hospitality, and e-commerce. A significant number of Airlines, Swiss International Airlines included, offer considerably different ticket prices for a similar flight. The airline uses different fences; for example, refundability, Saturday-night-stay-over, cabin, flyer programs, and advance ticket purchases, to apply various screening techniques and separate consumer groups into different segments (Escobari and Jindapon 2014, p.2). However, it is quite difficult to consider observed price dispersion as a form of price discrimination because the differences in the ticket prices result from the differences in the quality of services as well as the related costs (Dai and Serfes 2014 p.161). For instance, refundable tickets could have higher quality than non-refundable tickets and the prices of the airline seats at different times of departure depend on the demand expectations and their availability (Escobari and Jindapon 2014, p2-3). Therefore, time-variation in the airline ticket prices may not necessarily be regarded as price discrimination.

Since most airlines, including Swiss International Airlines, fly multi-route flights and there are no-show rates that differ by segment, the competition for seats among passengers take into account the longitudinal dynamics of the service or product. Passengers who want to fly from city A to city B are competing with passengers who want to fly from city A to city C via city B on a similar plane (Vasigh, Fleming and Tacker, 2013). This is a key reason...

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