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An Example of Oligopolistic Firm

Autor:   •  May 15, 2018  •  Thesis  •  858 Words (4 Pages)  •  48 Views

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        There are extremely high barriers to entry in the airline industry due to sunk costs and scale economies, which demonstrates that it is operated under an oligopoly. Due to the high barriers to entry, there are only a handful of companies in the industry, and most of them demonstrate market power (Federal Reserve, 1996). Delta, for example, is one of the largest airline companies in the United States next to Southwest, American, and United (Holmes, 2016). With the market power they have, Delta is able to use price discrimination to sell more plane tickets and make a larger profit. The objective of this paper is to determine how the airline industry uses price discrimination, and how they are able to earn extra revenue from doing it.

        Price discrimination involves charging different prices to different sets of consumers for the same good. One of the main principles behind price discrimination is that the firm is trying to make use of different price elasticities of demand (Federal Reserve, 1996). If people have a very inelastic demand, they are willing to pay a higher price. And if firms can set higher prices for the consumers with high inelastic demands, they can increase their revenue and profits (Pettinger, 2017). Delta is able to price discriminate by attaching various restrictions to cheaper flights, thereby making them unattractive to consumers with a low-price elasticity (Federal Reserve, 1996). Some consumers are more sensitive to prices (they have an elastic demand) and so they will respond to special offers and price discounts. Delta can benefit if they are able to separate the different types of customers and reduce their consumer surplus.

        Delta is able to charge different prices for tickets based on the following criteria: quantity bought, time of use (ex: higher prices at high peak times), age profile, and when the unit is bought (ex: discounts for buying early) (Pettinger, 2017). Quantity bought usually does not make a big difference in the airline industry, but Delta is a company that offers age profile discounts, such as senior discounts. Although, they have made restrictions that these discounts are only offered on certain flights and must be ordered on the phone and not online (Fares & Discounts). When it comes to individuals buying plane tickets, they tend to buy tickets from Delta early in advance. Buying in advance means that they will get their ticket cheaper than if they buy it right up front. This also means that remaining tickets that are not bought early will be bought by the people who are willing to pay a higher price (they have an inelastic demand). As Delta starts charging higher prices when seats fill up, they begin making a higher profit. Ideally, Delta wants to fill up all their seats on a flight, so they can do the opposite if a flight is not selling well. They will reduce the price of the tickets in order for more people to buy them. Therefore, the flight will fill up.

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