Qantas Price Discrimination Essay

a) Qantas should participate in first-degree price discrimination, defined by Wait (2014) to be a situation where each customer is charged their individual reservation price. To engage in price discrimination, Qantas needs to have significant market power, be aware of each customer’s reservation price and has to prevent arbitrage.

He also described a two-part tariff, which can be implemented where a flat rate is charged for the flight, with a per-unit fee for a range of amenities e.g. food, entertainment. As a result, consumers will engage in these facilities, until their individual maximum price is reached. Overall, he describes these varying prices to average out, capturing a larger market, transforming consumer surplus into profit.

b) Qantas should participate in second-degree price discrimination, described by Borland (2013) to be where consumers are forced to differentiate themselves, based on their choices. Loyalty programs can be utilised, where Qantas may offer free/discounted flights after a nominal amount. This is effective as higher prices can be implemented; maintaining the relatively inelastic customer base, whilst also engaging price sensitive customers with the prospect of a bulked cheaper purchase. He states that this not only captures a larger market, but it also ensures a long-term commitment. Furthermore, the overall price range would be averaged out, resulting in higher profits for Qantas.

c) The fact that businessmen are willing to travel to Brisbane and Coolangatta, allows for pricing strategies to be applied where Qantas can attain the maximum amount of consumer surplus. It is essential that Qantas prices the Coolangatta flight low enough to maintain their low value holidaymaker customer base, whilst ensuring that the flight and any additional expenses to travel to Brisbane will be appear more costly to businessmen. As a result, the Brisbane flight will be preferable and experience higher demand amongst business people. A higher demand allows Qantas to charge a rate equal to businessmen’s reservation price, resulting in greater profits. Wait (2014) described pricing strategies including offering classes of flights (with respective levels of comfort and prices), where businessmen can self-select the option most aligned with their reservation price, or bundling e.g. with hotels to provide an appearance of high value for money.

Similarly to q2, this situation is second-degree price discrimination as Qantas is initially unaware of the type of consumer defined by Borland (2013). The destination that is chosen exposes whether they are a holidaymaker/businessman, allowing the monopolist to charge the passenger’s reservation price.

Aforementioned, there is a substitution relationship between Coolangatta and Brisbane for businessmen. This relationship restricts Qantas’ ability to raise price, as businessmen would alternate to the more cost effective option. Assuming businessmen are frequent flyers, this relationship can be overcome by forming

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long-term contracts with business organisations for flights to Brisbane, ultimately restricting them to this route, outlined Boehmer (2012). Crmtrends (2014) asserts that loyalty programs can be used where more credit is earned by flying the Brisbane route, allowing businessmen to gain a natural preference for this route.

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REFERENCES

Boehmer, A. 2012, The pros and cons of airline contracting: buyers and airlines have much to assess in determining value, Business Travel News, viewed 22 May 2014, <http://www.businesstravelnews.com/Strategic-Sourcing/The-Pros-And-Cons-Of-Airline-Contracting--Buyers-And-Airlines-Have-Much-To-Assess-In-Determining-Value/?ida=Airlines&a=proc>

Borland, J. 2013, Microeconomics: Case Studies and applications, Cengage Learning, Melbourne.

Loyalty programs 2014, crmtrends, viewed 21 May 2014, <http://www.crmtrends.com/loyalty.html>

Wait, A. 2014, Monopoly and Market Power (BUSS1040), The University of Sydney, Sydney, 17 April, viewed 20 May 2013, < http://blackboard.econ.usyd.edu.au>

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