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Airline Industry: Pricing Structure and Strategies

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Airline Industry: Pricing Structure and Strategies
Airline Industry: Pricing Structure and Strategies

ABSTRACT
The profitability of an airline industry depends on filling seats, and on the company’s ability successfully to anticipate the cost and price structures of their competitors. However, many airline carriers have a hard time accomplishing this because the average airline passenger just needs to travel from one destination to another in the most convenient and shortest amount of time at a reasonable price. Therefore, customers in this market are not as loyal to one specific airline (brand) in the industries. The reason for this is that airline carriers provide the same services at similar prices. In addition, the passenger will only incur high switching costs if they choose to take another mode of less desirable transportation. Airline carriers have overcome these problems by using the strategy of “Price discrimination.” That is a strategy that allows them adequately to segment their potential passengers, and to offer different pricing structures that match passengers’ sensitivity to price and value differences in cost to serve, and their different competitive positions (Stern, 1989). While it also allows passengers to maximize their “expected utility” when flying with the airline carrier that meets their needs.

The 1978 deregulation of the airline industry has resulted in airline carriers being unable to make a profit by filling seats, and successfully to anticipate the cost and price structures of their competitors (Bailey, David, Graham, Kaplan 1985). According to statistic, the airline industries’ profits declined in 2001 through 2003 by $23.2 billion (Smith Jr. & Cox). During this time the average airline passenger just needed to travel from one destination to another in the most convenient and shortest amount of time at a reasonable price. However, because all airline carriers provide the same services at similar prices, the passengers in this market


References: Bailey, Elizabeth E., David R. Graham, and Daniel P. Kaplan. 1985. Deregulating the Airline. tickets." Journal of Revenue & Pricing Management 8.1 (2009): 96+. Academic One File Graham, David R., Daniel P. Kaplan, and David S. Sibley. 1983. “Efficiency and Competition in the Airline Industry.” Bell Journal of Economics, vol. 14 (Spring), pp. 118-38. McAfee , R. , Preston , PRICE DISCRIMINATION, 1 ISSUES IN COMPETITION LAW AND POLICY 465 (ABA Section of Antitrust Law 2008) The Wall Street Journal Interactive Edition November 3, 1997. http://www.nd.edu/~mgrecon/datafiles/articles/airlinefarestructure.html Ratiiff, Richard& Vinod, Ben Stavins, J. (2001) "Price Discrimination in the Airline Market : The Effect of Market Concentration", The Review of Economics and Statistics, 83, 1, 200-202. Stern Andrew, A. Pricing and Differentiation Strategies. Planning Review. Sep/Oct 1989, 17, 5. Retrieved 20 April 21, 2010, from ABI/INFORM Westermann, Dieter, (Realtime) dynamic pricing in an integrated revenue management and
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