Sep 15, 2013 - option for potential passengers (Block, 2008; Livingstone, ch3, 2013). .... reserved tickets are not being paid for when passengers don't show ...
Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736
Introduction Airlines have a unique way of handling airfare elasticity of demand. Several different types of flights run in and out of the airport on any given day. Some of these flights entail overnight stops at airports in other locations before they reach the final destination. Some involve passengers that are willing to pay just to wait at the airport in order to maintain access to their desired flight. The airline administration can monitor these flight options much easier for scheduling when passengers are willing to book their flights at least two weeks ahead of time. For this reason, the airlines are willing to provide discounts to passengers willing to take these flights during less optimal times.
Airline Ticket Discounts Saturday Night Stopover The elasticity of demand relating to discounts in certain types of airline tickets can be a complicated position to analyze. For instance, take the idea of discounting tickets for making a Saturday night stopover before reaching the ultimate destination. On a Saturday night it would be great to be in a town that is optimal, walking around, enjoying the crowds and the night life, visiting with familiar people, enjoying an enriching Saturday night with them before they have to go through the travails of preparing for work for the following week. It could be convenient for anyone to have a free evening to get familiar with the destination area, especially if travels are going to require a longer stay; enjoying the areas hospitalities.
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Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 Most people do not like spending a Saturday night at a holdover area in an airport trying to find some sort of entertainment out of airport overpriced amenities. Therefore, if they are going to buy a ticket that requires a Saturday night stopover, it would be more pleasant if it were at a bargain price. This sort of pricing scheme seems like it would definitely curtail the effects of a common traveler’s tragedy; primetime holdovers at an airport, which could become cause for a very highly elastic option for potential passengers (Block, 2008; Livingstone, ch3, 2013).
It is general knowledge that most people would prefer to look for other options should they be available, including the use of other local airports. However, preference is a lot different than accommodation (Livingstone, ch3, 2013). With a discount on the price of these sorts of tickets, the preference of obtaining a bargain price supersedes the need to find alternative airlines at the going rate. This sort of ticket pricing makes it easier to raise the prices for the tickets that do not do Saturday stop-overs because customers are more willing to buy them at a higher price. Passengers would take the stop-over tickets regardless, if the flight got them to their destination and price options were limited. Therefore, the pricing structure of this ticket is only unit elastic. It depends highly on the number of other flight options available and their price incentives (Livingstone, ch3, ch4, 2013).
Earlybird Ticket Reservations It is also common knowledge that most people do not purchase their tickets early, and this can be evidenced by the price incentives commonly deployed by the airlines. 2 9/15/2013 12:38 PM
Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 Many times passengers appear at the airport on a last minutes notice and buy the tickets right before the flight. Other times they get stuck on other things and forget to purchase tickets until right up close to the time to leave. Some people may purchase the ticket ahead of time and then never even show up for the flight because of plan changes.
These last minute purchasing decisions can deeply effect the operations of the airport administration. There are times when less desirable flights, or even ones that run maybe 15 minutes behind the others, may have very few passengers willing to travel on them. In such situations, there isn't much sense to fly the plane for the number of fares obtained in lieu of the expense of actually conducting the flight. Airport administrators need some sort of calendar to call upon in order to know when it is safe to make scheduling changes without losing customers.
These same sort of scheduling dilemmas take place for flights where passengers have reserved seating’s in advance of departure times; extra seats may become available when the reservation holders do not show, or not as many passengers purchase last minute tickets as expected. These flights are now able to accommodate the few passengers previously settling for those less desirable flights that were unable to fill up enough seats to make departure worth the price of the tickets sold.
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Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 Therefore, it does the flight company more good to have these seats reserved ahead of time to plan the budget for the individual departures than the try to guess on seating logistics at the last minute. If there are not enough seats taken on the “overflow” craft, flight destinations can be rearranged or cancelled according to demand. So, it becomes highly beneficial to the airport to create incentives for passengers to book at least two weeks ahead of time. Most passengers will be sure to book ahead whenever they can if they know they will get a drop in price for it (Block, 2008; Livingstone, ch4, 2013).
The mechanics behind advanced flight registration also goes hand in hand with the number of stand-bye tickets that will be reserved for sale during the flight; such that the more reservations there are, the more stand-by tickets are available for purchase. Most people would think there would be fewer tickets available with greater numbers of reservations; however this pricing scheme actually works against the number of cancellations that are possible. Most likely a person would not appear at the airport to buy a ticket for that day and then just not sit in on the flight. However, with preordered reservations it is very possible that someone may need to cancel or employ a rain check (Livingstone, ch1, ch3, 2013).
This discount pricing structure is highly unit elastic in structure, meaning that the elasticity of the price does not fluctuate except according to price incentives, because alternatives are not available. The main factor to be considered here is whether or not 4 9/15/2013 12:38 PM
Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 customers are willing to purchase the tickets in advance. The pricing discount is the basis for choosing to order so early; otherwise it is simply more convenient to wait up until about the time to take the flight to purchase the tickets (Livingstone, ch3).
The pricing incentive creates both a monetary incentive as well as a reason for the seats to no longer be available should a passenger decide to wait until too close to the scheduled departure. Customers want their flight to be secured, and at the best price, so they tend to go for the discount. Customers usually have a good relationship with the airport that they normally choose to use, and there are more reasons to take the early bird discount than there are to by-pass it and pay extra just to wait to buy the tickets (Livingstone ch3, ch4, 2013).
Standby Ticket Advantages Controversy over the purchase of standby tickets should be a given: no one wants to standby an air craft waiting to see if there will be enough seats when its possible that they may not even get the ride. The airport is already running a gamble to allow passengers to reserve the seats ahead, expecting the passengers to actually honor their ticket purchases. These airlines sometimes make a profit out of allowing passengers to sit on standby until a plane that matches their destination becomes available, at a nominally reduced price. This is because the seats that are given up from cancellations and rain checks are no longer being paid for, except through these standby tickets. The funds that are being budgeted for receipt by payment of the 5 9/15/2013 12:38 PM
Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 reserved tickets are not being paid for when passengers don’t show up, yet the reduced price stand-by tickets do allow some cash flow funds to be placed into the account to cover for the projected budget (Block, 2008; Livingstone, ch4, 2013).
Both factions are undergoing a risk at this time; ie to purchase tickets ahead that are nonrefundable that may not get honored, and to allow passengers to reserve seats ahead of time that can be cancelled before the departure time. Even so, when all sides work as planned, both factions benefit in the long run (Block, 2008; Livingston, ch4, 2013). This option only becomes elastic in the hands of the customers that purchase the tickets. The tickets themselves are highly elastic when quantified as a factor of consumer need, but the elasticity of demand depends on the personal situations of the customers more than the decisions of the airlines. Even at the reduced pricing, these tickets really would not be of much value unless a customer is already desperate for a quick ticket at a reduced cost. For that reason, the tickets are highly inelastic. Airports would not have to offer a discount to sell the tickets, yet they would benefit in the long term to develop the consumer relationship by reducing the price (Block, 2008; Livingstone, ch3, ch4, 2013).
Store Discounts Stores also offer discounts to certain types of consumers. These discounts are given to different populations of society in order to keep people shopping with them. A majority of consumers are not in need of a general store discount, even though a lot of consumers enjoy the occasional discount on particular items. However, some specific 6 9/15/2013 12:38 PM
Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 demographic populations may be more likely to buy if they could get a discount on anything in the store (Block, 2008; Livingstone, ch2, 2013; Schaeffer, 2006). Common groups for receiving such price incentives include Senior citizens and students. Senior Discounts Senior discounts and student discounts are very convenient benefits to these demographics. These two populations are reasonably less able to afford some luxuries that other population who are in good health with average work credentials may consume with ease. Most senior level citizens have reached retirement age and no longer make the wages they have been accustomed to for a good portion of their lives. They are no longer willing to spend the same amount on luxuries as they had been during the peak of their careers. Many of them are thinking about what they may owe to debtors and what sorts of debts they are willing to leave behind for their offspring to have to deal with. They are less likely to want to spend much on things they do not need because the price of these goods is too high (Block, 2008; Livingstone, ch3, ch4, 2013). Student Discounts Similarly, students are not able to work at wages that will provide them with their full income capabilities. Rather they are challenged to work as many hours as they can in entry level positions while keeping current with their school studies. Most have parents that are unwilling to support them past the occasional gift or caretaker visit. Luxuries just are not something they are able to afford easily (Block, 2008; Livingstone, ch3, ch4, 2013). 7 9/15/2013 12:38 PM
Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 Store Discount Elasticity Discount programs are structured so that the discounts compensate for the average monetary disadvantage of these populations, making spending a little bit easier for them (Block, 2008; Livingstone, ch2, 2013; Schaeffer, 2006). With the discount plans, the only option needed to determine elasticity is whether or not to purchase goods from the store offering the reduced pricing. The discounts are a generalized type plan in which all items undergo the same level of advantage from the discount. The range of goods offered is the same, only at a more affordable price. Elasticity in these situations is structured entirely around which establishment is offering the discount, and how much the discount is at each. These benefits make it easier for them to afford the luxury and they are more likely to purchase (Block, 2008; Livingstone, ch2, ch3, 2013).
Basically, the discounts split the supply and demand curve according to different populations and produce a pricing structure that matches the curve at all three levels. So the price that would meet the demand curve for seniors is honored by the senior discount, the price that would meet the demand curve for students is honored by the student discount and the same for the demand curve of the general population, which is met without the discounts. This practice actually brings down what was a highly elastic situation into a more stable, less elastic situation. The elasticity is not solved since it involves luxuries, however it has been decreased. The discounts at the airlines are slightly different (Block, 2008; Livingstone, ch3, ch4, 2013; Schaeffer, 2006).. 8 9/15/2013 12:38 PM
Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736
Airline Discounts vs Store Discounts The airline discounts are determined mainly in regards to the options available to passengers. Wherever there is a less favorable option, the airline creates a discount to counteract the inconvenience. Originally the options were highly elastic due to the availability of alternatives, so the demand was only unit elastic; the price discounts created an incentive to purchase (Block, 2008; Livingstone ch3, 2013). This creates a higher level of desire for the unfavorable choices because they accompany a favorable price.
The store discounts are slightly different. Even when the discounts are employed, there are still many options to choose from. The decision dealt with for these is narrowed to either shopping at that particular store or going to a different store. Rather than to use the discounts to steer the consumers to purchase less desirable goods; these discounts encourage consumers that otherwise would have difficulty affording anything, to make any kind of purchase at a better market demand price for their category of consumer. With a higher level of options for the shoppers to access with ease, elasticity becomes more stable. Now they can choose from anything in a particular store at the same reduced cost, whereas previously they would have to wait for an item to go on clearance or exercise a good bargain to decide to purchase it (Block, 2008; Livingstone, ch2, ch3, ch4, 2013; Schaeffer, 2006).
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Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736
Conclusion While senior and student discounts are available only through the store(s) offering them as a means to draw in new customers, airline customers are still able to go elsewhere and bargain by other means to get what they want at the price they are willing to pay. These customers may be more advantaged or they may be more disadvantaged as far as their level of income, their level of advantage is not a part of the elasticity equation. So while the elasticity of the senior and student discounts relates entirely to the ability to afford some luxury, the ticket discounts depend entirely on ticket preferences and a means to encourage a broader purchase of less desirable options.
In this regards, the target of efficiency for the store discounts is on obtaining a certain class of customers where the target of efficiency for the ticket discounts is based upon which flights are being sold. A similar type of discount to the airline tickets that can be found in stores is comparable to clearance sections when items are not being purchased at the regular price. Senior and Student discounts would still take a percentage off of the clearance prices for those eligible for the discount. So each demographic status still has the same incentive to purchase the clearance items as they would for the regular items. Some airports also employ senior and student discounts on top of their special ticket options. That way they can cater to target populations and still work to gear buyers towards certain ticket options on equal
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Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736 terms. While the price elasticity may be different, they can still interact with one another ot create a higher level of cost efficiency.
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Price Discount Elasticity DMBA620 Fall 2013 Assignment 1 Aylor, Bonnie R / 0801736
References Block, Walter. (2008). Rent Control. The Precise Encyclopedia of Economics. Retrieved on 09/2013. Retrieved from: http://www.econlib.org/library/Enc/RentControl.html Livingstone, Les. (2013). Specialization, Trade and Prosperity, Chapter 2. Economics Made Easy, 3rd Edition. Pp62-79. Univeristy of Maryland University College.
Livingstone, Les. (2013). Demand for Goods and Services, Chapter 3. Economics Made Easy, 3rd Edition. Pp62-79. Univeristy of Maryland University College.
Livingstone, Les. (2013). Supply of Goods and Services, Chapter 4. Economics Made Easy, 3rd Edition. Pp62-79. Univeristy of Maryland University College.
Schaeffer, Brett D. (2006). How the Scope of Government Shapes the Wealth of Nations. The Heritage Foundation; Heritage Lecture #925.
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