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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 customers 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 businessmens 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 passengers
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>