An airline can sell tickets from Sydney to Melbourne to two types of customers:

Question

An airline can sell tickets from Sydney to Melbourne to two types of customers: business and leisure travelers. Each customer will purchase one ticket only. Assume that the cost of providing either good (flight in economy or business) and the tickets are zero. The valuation or willingness to pay ($ per ticket) each type of buyer place on both types of tickets is presented below:

Which of the following pricing schemes yields the highest profits if the firm cannot identify the type of buyer who is making the purchase? Assume that if the customer is indifferent between buying a ticket or not, he buys it.
Note, PE is the price of the economy ticket and PB the price of the business ticket.

Explanation / Answer

Firstly we can eliminate the third, fourth and fifth options because in the third option PE = 300 which exceeds the maximum willingness to pay for economy tickets; the fourth and fifth options have PB = 259 and 261 which would be not profit maximising for the airline.

Now considering the first option we see that the airline will charge both the classes $80 when it can also generate higher revenues charging $300 to the business customers flying for business purposes. Thus we are narrowed down to the second option.

The business customers flying for business purposes can be charged $300. So the business class tickets can be priced at $300. The rest customers can be charged $80 because its the maximum willingness for business customers flying for leisure purposes and  economy customers flying for leisure purposes. For the economy customers flying for business purposes the $80 is affordable because it is less than their willingness to pay.

Hence, PE=80; PB=300.

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