Question

Using the concept of price elasticity of demand explain why an airline would practice such a pricing policy.

Answer 1

Airlines follow a price discrimination policy, where they charge different ticket price from different customer segments, typically charging lower airfare from economy class and higher airfare from business class.

Price discrimination is profitable when lower price is charged from elastic segment of market, and higher price is charged from inelastic segment of the market. Economy class passengers have more elastic demand for air travel and business class passengers have more inelastic demand for air travel, therefore airlines profit by charging higher price in business class and lower price in economy class.