A traveller's guide through airline price discrimination

Airlines use price discrimination to charge consumers different prices. Photo / 123RF

After spending days wondering where you would like to go, you finally reach a decision and pick up a destination. Flights are only a click away aren't they? But, once on the airplane, you might not be aware that a person sitting next to you paid a completely different airfare price for the same trip.

Some might wonder, why would airline companies discriminate between consumers in the first place and what are they trying to gain ? The answer lies behind the economic concept called "price discrimination".

Price discrimination

Price discrimination is a pricing strategy companies use to charge different prices to consumers for the same or similar product or service. The rationale lies behind the motivation of the company to sell more units and earn more profit. By charging different prices to customers, they are able to grab the maximum consumer surplus available in the market.

The practice is present across different industries and it is more common than you might think – in fact, most companies use it all the time. If you have ever encountered 2 for 1 offers, student discounts, reduction coupons or vouchers, you have witnessed a price discrimination in action.

Nevertheless, it has been most successfully implemented and developed across a wide range of services such as transportation (flights, trains, Uber), tourism and hospitality (restaurants, hotels, amusement parks), communication such as mobile phones or even utilities such as electricity.

When it comes to airline pricing, a whole new level playing field began with the introduction of low-cost carrier concept, whose origins date back to the 1970s when Pacific Southwest Airlines was founded as a pioneer in this field. An additional boost came in the mid-1990s with the introduction of the "peanut airlines" such as Easyjet, Ryan air in Europe, as well as their peers in Australia, New Zeeland and finally, Asia in early 2000.

Now, what are the factors that are going to influence the price of the airfare you will pay ?

Timing is key

Firstly, all depend when you purchase your ticket.

If you buy it in March for a trip that will take place in August, you are going to pay a significantly lower rate in comparison to someone who decides to buy the ticket last minute. Generally, people who plan their holidays well in advance are more concerned about paying a lower price than those who book it closer to the departure date.

As a consequence, airlines use the low-high pricing mechanism known as inter-temporal pricing, which allows them to target both price-sensitive and price-insensitive consumers. This represents a form of price discrimination, particularly evident among low-cost airlines. As explained by Air Asia, if you "want cheap fares, book early. If you book your tickets late, chances are you are desperate to fly and therefore don't mind paying a little more."

You might have also experienced a frustrating situation when the price of an airfare (or a hotel booking) changes from one day to another, or even on an hourly base.

This happens since the airline wants to attract price – sensitive consumers and therefore has a certain number of economy tickets reserved to be sold at lower prices. If these seats start filling up quickly, the airline will charge a higher price for the remaining seats.

Screenshot from the Booking.com website for a stay in Paris.

Travel in mid-September on a Sunday morning

The airfare price will also depend on the months during which you will travel. Most people have limited options and would usually take off during school holidays.

For these people vacationing in mid-September would not really be an option. Knowing this, airlines differentiate between peak and off-peak demand periods and charge different rates of airfares.

This is known as the peak-load pricing, practice of charging higher prices in peak demand periods. Another example where peak-load pricing is applied would be travelling in different periods of the day. Generally, there are flight times that are considered as "unpopular" and for those the demand is lower.

An example would be an early Sunday morning flight. Airfares for return flights on a Sunday evening will be more expensive than those for the same flight on a Sunday morning, simply because people want to make the most of their vacation or weekend, and thus choose to take a later flight.

It's either seat options or a Saturday night stay-over

Airlines also use versioning, form of a price discrimination where different prices are applied based on the quality of the transport service provided. Several versions of the same ticket are available to customers. High quality version of an airfare is more expensive but provides traveler with options such as flexibility to modify flight dates and even cancellation of the ticket without paying penalty fees.

On the opposite end, the low quality version of the airfare is "restricted". There are also versions that are considered as "damaged", such as an airfare with a Saturday night stay-over. Additionally, low cost airlines like Easyjet or Ryanair charge for extras like choosing your seat position or check-in luggage. Other examples of versioning include travelling in business class – the airfare is more expensive to the one of the economy class, since passengers benefit from a high quality service, more space, wholesome meals, as well as more personalized attention from the airline staff in comparison to economy class passengers traveling on the same flight.

Finally, quantity discounts and frequent flyer loyalty programs are also ways how airlines apply different pricing for airfares. If we take an example of Ryanair, the airline will provide a personalized quote on demand for those travelling in bigger groups, while Wizz Air provides a possibility of joining the Wizz Discount Club with different options of loyalty programs tailored to passenger's specific needs, such as traveling in a couple or traveling in group up to 5 members.

While airlines, like any other companies, target consumers by using different pricing policies in order to increase sales, there is no reason why you should not do the same.

So, if you're planning a trip by yourself, with another person, with a group of friends or family, keep these points in mind in order to secure the best possible deal when booking your airfare.

Price discrimination does not have to be a negative thing, as there are consumers who in fact clearly benefit from it. Some even go further and

use specific websites

such as

SecretFlying

or

HolidayPirates

to take advantage of mistakes made by companies using price discrimination.

This article was originally published on The Conversation. Read the original article.