Question

How to explain the first-degree price discrimination in the airline industry?

Answer 1

If you buy a ticket several months in advance it tends to be cheaper. If demand for the particular flight is high, then the airline starts putting up the price of that flight. It means that the remaining tickets will only be bought by people willing to pay a higher price (inelastic demand). If a particular flight is not selling very well, the airline will do the opposite and reduce the price. This lower price attracts more people who are sensitive to prices and ensures that the flight will fill up.

Ideally, the airline would like to fill up the plane with passengers paying the most they are willing to pay.So, it leaves the consumers indifferent between buying the ticket and not buying it.Thus, it tries to extract entire consumer surplus.In this way,airline industry uses first degree price discrimination in order to maximize its profits.