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PEAK LOAD PRICING AND PRICE DISCRIMINATION: AIRLINES AND HOTELS Twenty years ago the theory of peak load pricing was well developed. Since then it has been successfully applied in many areas not just in network industries. In some ways, given the head start that peak load pricing had in network industries the progress has been disappointing in these industries relative to elsewhere. Peak load pricing in other industries, notably airlines and hotels, has become successful largely because of advances in computing, telecommunications and the Internet. The airlines, by employing techniques like artificial intelligence, have successfully combined peak load pricing with price discrimination. The main device used for price discrimination is flexibility in travel schedules. Business travelers require flexibility in their travel plans. They may need to travel at a moment’s notice. Their plans may change or the business gets concluded more quickly and he wishes to return early. They normally travel during the business week. Given these characteristics of the business traveler’s demand function is clearly more inelastic than that of say leisure travelers. In addition, airlines can readily identify business travelers making it feasible and profitable to employ third-degree price discrimination. They create two principal market segments – tickets with restrictions as to advance purchase, refunds, etc and unrestricted tickets. Within these two broad classes there are varying degrees of restriction. Lower price tickets must be purchased in advance – usually at least 7 days – and cannot be changed without penalty. In addition, a Saturday night stay may be required. The airlines have found relatively straightforward ways of identifying the travelers with lower demand elasticity and prevent transfer and arbitrage thus making price discrimination highly successful. The Airlines combine price discrimination with peak load pricing not in the way peak
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This note was uploaded on 04/27/2010 for the course 223 581 taught by Professor Crew during the Spring '10 term at Rutgers.

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