Airlines charge different prices for the same trip depending on which direction

Question

Airlines charge different prices for the same trip depending on which direction passengers are flying. International flights had the biggest directional price differences. Between New York and London, travelers paid $2,507 on average if they started in New York and $1,672 if they began the trip departing from London, an $835, or 50%, boost. Between New York and Tel Aviv, people leaving from the U.S. paid $354, or 28%, more on average than people in Israel—$1,618 if the round-trip began from New York’s Kennedy Airport versus $1,264 if the trip started at Tel Aviv. And there isn’t any cost difference to the airlines for the round-trip no matter which direction is flown first.[1] Questions: a) Define third-degree price discrimination. Consider the case in which flights from New York to London and from London to New York are not full. Suppose the flight from New York to London is more expensive. Is this example of third-degree price discrimination? Explain your answer. b) Define second-degree price discrimination. Business travelers, who have a more price-inelastic demand, sometimes reserve flights at the last minute, while leisure travelers plan ahead. Is the case in which an airline raises the price of a flight as its date approaches an example of second-degree price discrimination? Explain.

Explanation / Answer

Ans a) Third degree of price discrimination-is a form of price discrimination in which a seller charges different prices to groups that are differentiated by an easily identifiable characteristic, such as location, age, sex, or ethnic group. This is the most common type of price discrimination. This is one of three price discrimination degrees.The example in this case is that of third degree price discrimination.

b)In second degree price discrimination, price varies according to quantity demanded. Larger quantities are available at a lower unit price.

The example stated in the case is an example of third degree price discrimination

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