This paper discusses the practice of price differentiation in the airline industry and how airlines use yield management systems to control their different prices.
Consequently it is explained how price differentiation is realised. Emphasis has been laid on discussing whether price differentiation is discriminatory and why it should be acceptable, even if it is discriminatory. In the second part the principles of yield
management are explained and the major challenges with regards to the latest developments in electronic commerce are reviewed.
Table of Contents
1. Introduction
2. Pricing Strategies
3. Price Differentiation and Price Discrimination
3.1 What are the Reasons for Price Differentiation?
3.2 How is Price Differentiation Done?
3.3 Is Price Differentiation Discriminatory?
3.4 Predatory Pricing
4. Yield Management
4.1 The Principles of Yield Management
4.2 The Pros of Yield Management
4.3 The Cons of Yield Management
4.4 The Benefits of Yield Management Systems
5. Challenges of Electronic Commerce for Yield Management
5.1 Net Discounts and On-line Auctions
5.2 The Electronic Airfare Continuum
5.3 Consumer Empowerment
6. Conclusions
Research Objectives and Themes
This paper examines the application of price differentiation within the airline industry and investigates how airlines utilize yield management systems to optimize revenue through inventory and pricing control. The study specifically addresses the ethical concerns regarding price discrimination, evaluates the efficiency of these strategies, and reviews the impact of electronic commerce on future yield management practices.
- Mechanisms and justifications for price differentiation
- Economic and ethical perspectives on discriminatory pricing
- Core principles and operational objectives of yield management
- Strategic advantages and limitations of yield management systems
- Future implications of internet-based booking and electronic commerce
Excerpt from the Book
3.3 Is Price Differentiation Discriminatory?
'In the strict economic sense price discrimination is taking place when a producer charges different prices for different units of essentially the same commodity for reasons not associated with differences in the cost of production'. (Hanlon 1996)
According to this traditional argument price the answer is 'yes', but it was dismissed by Frank (1983):
'Differential pricing is preferable on efficiency grounds to the alternative of charging a single price to all buyers when there are important scale economies in production. If scale economies do not exist, open competition should result in output being sold to all buyers at marginal cost.'
As presumed by Frank several studies found an airline industry characterised by economies of density, returns to scale at the route and aircraft level as well as significant economies of scope and networking (Gillen et al 1985, Antoniou 1991, caves et al 1984). This chapter could close here, but it is worthwhile to follow the discussion about price discrimination in more detail.
Summary of Chapters
1. Introduction: Provides an overview of the history of price differentiation in the US airline industry since deregulation in 1978 and the emergence of yield management.
2. Pricing Strategies: Outlines the three generic pricing approaches—cost-based, value-based, and competition-based—within the context of airline profitability.
3. Price Differentiation and Price Discrimination: Analyzes the reasons for price differentiation, its implementation methods, and the ongoing debate regarding its discriminatory nature and ethical acceptability.
4. Yield Management: Explains the principles, operational pros and cons, and the overall business benefits of yield management systems in maximizing profit from perishable seat inventory.
5. Challenges of Electronic Commerce for Yield Management: Explores how digital direct booking, online auctions, and increased consumer information access impact traditional yield management structures.
6. Conclusions: Synthesizes the findings, confirming that while yield management is essential for airline survival, it faces new complexities due to electronic commerce and evolving consumer power.
Keywords
Price Differentiation, Yield Management, Airline Industry, Price Discrimination, Deregulation, Revenue Management, Electronic Commerce, Consumer Surplus, Inventory Control, Fare Classes, Competitive Pricing, Market Segmentation, Internet Booking, Demand Forecasting, Airfares.
Frequently Asked Questions
What is the primary focus of this paper?
The paper explores how airlines implement price differentiation and utilize yield management systems to optimize revenue in a post-deregulation environment.
What are the core thematic areas covered?
The study covers pricing strategies, the ethics of discriminatory pricing, the operational mechanics of yield management, and the disruption caused by electronic commerce.
What is the main objective of the research?
The goal is to explain how price differentiation is realized, evaluate whether it constitutes unfair discrimination, and discuss how airlines manage these complexities.
Which scientific approach is used to analyze these topics?
The paper employs a qualitative review of industry literature, economic theories regarding market competition, and historical case studies of airline performance.
What does the main body of the work address?
The main body investigates the technical application of yield management, the economic justification for varying airfares, and the transition toward digital distribution channels.
Which keywords best characterize this work?
Key terms include Price Differentiation, Yield Management, Airline Industry, Price Discrimination, and Electronic Commerce.
How does the author define the relationship between price differentiation and product differentiation?
The author notes that price differences are often tied to service quality variations (like legroom or check-in speed), leading some to argue that what is termed "price differentiation" is actually "product differentiation."
What specific ethical dilemma does the author identify regarding electronic commerce?
The author discusses the "ethical mine field" of using web-based consumer data or 'cookies' to implement individual, real-time pricing, which may lead to significant consumer opposition.
What role did People Express play in the context of yield management?
People Express is cited as a notable example of an airline that failed because it lacked a functioning yield management system to effectively navigate competitive fare wars with rivals like American Airlines.
- Arbeit zitieren
- Paul Freudensprung (Autor:in), 1998, Price Differentiation and Yield Management in the Airline Industry, München, GRIN Verlag, https://www.grin.com/document/186328
