Price Elasticity (Fig 5.6) DeDe DeDe DiDi DiDi Price per unit of service Quantity of units demanded D e : Demand is price elastic. Small changes in price.

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Presentation transcript:

Price Elasticity (Fig 5.6) DeDe DeDe DiDi DiDi Price per unit of service Quantity of units demanded D e : Demand is price elastic. Small changes in price lead to big changes in demand D i : Demand for service is price inelastic. Big changes have little impact on demand Price elasticity = Percentage change in demand Percentage change in price

Key Categories of Rate Fences (1) Rate FencesExamples Physical (product-related) Fences Basic product Class of travel (business/economy class) Size and furnishing of a hotel room Seat location in a theater Amenities Free breakfast at a hotel, airport pickup, etc. Free golf cart at a golf course Service level Priority wait-listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team

Key Categories of Rate Fences (2) Nonphysical Fences Transaction Characteristics Time of booking or reservation Requirements for advance purchase Must pay full fare two weeks before departure Location of booking or reservation Passengers booking air tickets for an identical route in different countries are charged different prices Flexibility of ticket usage Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Nonrefundable reservation fees

Key Categories of Rate Fences (3) supplement Nonphysical Fences (cont’d) Consumption Characteristics Time or duration of use Early-bird special in restaurant before 6PM Must stay over on Saturday for airline, hotel Must stay at least 5 days Location of consumption Price depends on departure location, especially in international travel Prices vary by location (between cities, city center versus edges of city)

Relating Price Buckets and Fences to Demand Curve Price per seat Capacity of 1 st class cabin Capacity of aircraft No. of seats demanded 1 st class Full fare economy (no restrictions) 1 - week advance purchase 1 - week advance purchase, Saturday night stay 3 - week advance purchase, Saturday night stay Specified flights, book on Internet, no changes/refunds Late sales through consolidators/Internet, no refunds 3-week advance purchase, Saturday night stay, $100 for changes * Dark areas denote amount of consumer surplus (goal of segmented pricing is to reduce this)