‘You Paid How Much for That Ticket?’

Have you ever used a “student discount” when purchasing a good or service?   Do you think it is fair that you get to pay a cheaper price for the same product, just because you are in school?    What other types of discounts are available?   Would you consider this discrimination?    If you are an economist, then you would refer to this as price discrimination.  Why would a company practice price discrimination?

• Define the term price discrimination.
• Compare and contrast price discrimination with age discrimination.
• Apply the concept of price discrimination to the movie theater market.

• I’m Not Paying That!:  This Plus Magazine article provides an actual case of paying too much for a service, airlines.
  https://plus.maths.org/content/os/issue37/features/currie/index
• Disney Discovers Peak Pricing: Disney Discovers Peak Pricing.
• The Robinson-Patman Act:  This Federal Trade Commission page explains circumstances in which charging different prices to different customers is illegal.
  www.ftc.gov/speeches/other/patman.shtm

Now you might be wondering just what discrimination has to do with a web site dedicated to economics, but did you know that discrimination is sometimes at work in the prices you pay for goods and services? Consider the situation of two individual who want to travel from New Jersey to Seattle for the weekend on Airline X. Each person buys a ticket for the same airplane, in seats 11-A and 11-B, respectively. Jose buys his plane ticket online after he receives an e-mail posting from the Airline X advertising a bargain price for a flight to Seattle. Jose has friends in Seattle he would like to visit, and this weekend is as good as any. Kelly, on the other hand, is already at the airport and buys her ticket directly from Airline X. Kelly has just been directed by the company she works for to be in Seattle for an important Saturday morning meeting. Both people are buying the exact same service (transportation to Seattle), and they will be sitting in seats right next to each other. Explain why it would be reasonable to assume that both tickets will cost the same amount. [The tickets represent an identical service, so we would expect that each person paid the same amount.] Do you think Jose and Kelly actually paid the same amount for their tickets? Go to https://plus.maths.org/content/os/issue37/features/currie/index to read about an actual case of paying too much for a service.

You have just read about a case of price discrimination. If Jose represents the online purchase, how much did he pay for his plane ticket to Seattle? [$200] If Kelly represents the person at the airline counter, how much did she pay for her plane ticket to Seattle? [$1,000] How much more did Kelly pay for the same ride to Seattle? [$800]

How is Airline X able to charge different prices for an identical ride to Seattle? Do you think this is a good business practice?

Discussion Questions

1. Define price discrimination.
2. Describe the difference between Jose’s and Kelly’s need to travel to Seattle.
   
3. Is it likely that Jose would pay $1,000 for a plane ticket to Seattle?  Why or why not?
4. Why is Kelly willing to pay $1,000 for plane ticket to Seattle?
5. If you buy a $200 ticket from Airline X on the Internet, what keeps you from reselling it to Kelly for $500? 
6. Is price discrimination a good business practice?

ANSWER KEY

1. Define price discrimination. [Price discrimination is selling the same product to different people at different prices based on the willingness or ability to pay.]
2. Describe the difference between Jose’s and Kelly’s need to travel to Seattle.
   [Jose want to visit friends but doesn’t absolutely need to be in Seattle. Kelly, on the other hand, is required to be in Seattle for a Saturday meeting.]
3. Is it likely that Jose would pay $1,000 for a plane ticket to Seattle?  Why or why not? [No, it is not likely that Jose would pay $1,000 for a plane ticket to Seattle. Jose’s trip is for pleasure, and he has time to shop around for a good deal on a plane ticket.]
4. Why is Kelly willing to pay $1,000 for plane ticket to Seattle? [Kelly’s trip is a last-minute requirement and she does not have time to shop around for a cheaper one. Differences in elasticity of demand are at work in this example and may provide a good review for students or an introduction to the concept.]
5. If you buy a $200 ticket from Airline X on the Internet, what keeps you from reselling it to Kelly for $500? [Airline tickets are nontransferable, so Airline X is able to exercise control over their service.]
6. Is price discrimination a good business practice? [In this example both people benefited from their purchases, and Airline X was able to sell two additional seats.] Arbitrage is the technical term for the practice of profiting in price differences.

To summarize, Airline X is able to practice price discrimination because of three critical factors.

1. The airline can separate customers into categories.
2. Customers have different abilities to pay different prices.
3. The airline has market power, which is the ability to influence prices and output in a market, as in blocking resale of airline tickets.

Price discrimination occurs in a number of other markets. To find out more about price discrimination, visit Disney Discovers Peak Pricing.

Based on the information in the article, discuss the following questions:

1. How do airlines keep business travelers from purchasing economy-priced seats?
   [Narrower, uncomfortable seats.]
2. Name two markets other than airlines that practice price discrimination.
   [Telephone companies, grocery and department stores, and health care.]
3. Why are some types of price discrimination considered good for the economy?
   [Price discrimination practices may benefit the buyer and the seller, as in the telecommunications and airline industries.]
4. Explain how a movie theater night practice price discrimination. Include in the explanation a discussion of the three critical factors for price discrimination.
   [Movie theaters typically discriminate with price differences for matinees, weekdays, younger and older patrons, and sneak previews. People must have differing abilities to pay for movie tickets so that the theater can charge more in the evening than the afternoon. The theater must be able to group customers and exercise market power. Market power will depend on the number of competing theaters.]
5. As a group, brainstorm several other examples of price discrimination.
   [Hotel rates, rates for rental cars and ski tickets.]

In some cases price discrimination is illegal, as detailed in the The Robinson-Patman Act. Visit this link below to explore the circumstances in which charging different prices to different customers is illegal.