Blog Post #7: Why airfare prices becomes less elastic over time: How are price discrimination and time related

When we look at airfare ticket prices for any given flight, it's clear that prices are neither fixed at any kind of rate based on distance, nor are they stagnate over the time period leading up to departure. Southwest Airlines does offer some of the most affordable tickets, however, the price of reserving a seat becomes more and more expensive as the date of the flight approaches. In other words, reserving a seat on a flight that leaves months from now is less expensive than reserving a seat on a flight that leaves today. Why? Well let me start by explaining elasticity of demand.

So, in this case elasticity is a concept that refers to how demand is effected by changes in price. Keep in mind that, in the long run demand is always going to be elastic for things that we do not absolutely need in order to survive. Opposite to this, in the short run, there are some goods where demand is inelastic, meaning you will buy whatever is being offered regardless of price (within reason). In the case of airline tickets, airlines are smart and recognize the differences in elasticity of demand for tickets through the time leading up to the departure of each of their flights. Charging higher prices near departure an lower prices for reservations made well in advance is an excellent way to maximize the amount of money airlines are able to make per seat sold and prices are kept in check by consideration of the point in which customers will chose an alternative method of transportation (also called a substitute).

The line labeled "demand 1" is more elastic than "demand two". We know this because a steeper demand curves show that people are less sensitive to increases in price in terms of the quantity that they will be willing to pay for. A demand curve with a lower gradient (demand 2) shows that consumers will consume less if the price goes up and more is the price goes down. 

Selling pencils outside of an exam room to students who only brought a pen or nothing at all two minutes before a test begins for $10 a piece is just like an airline that sells tickets for a flight that departs in an hour for prices that are significantly higher than the price for the same seat booked a month in advance. Airlines use price discrimination over time in order to maximize the amount of money that they are able to take in for every seat they sell. Now just because the concept is called price "discrimination" doesn't mean that there are any inherent unethical tactics at play. The price variations are the same for any one who wants to purchase a ticket, and the tickets are equally available to everyone. If explaining this seams a bit overly defensive, well its meant to be. Businesses are often scrutinized for marketing tactics that use variable prices, but these arguments that are made only look at the differences in the prices that people have to pay rather than considering the fact that the same prices are offered to everyone for each increment of time leading up to the flight. Airlines aren't able to control when customers book their tickets.

https://www.google.com/search?q=airline+industry+price+discrimination&espv=2&biw=935&bih=891&source=lnms&tbm=isch&sa=X&ved=0ahUKEwi4xY-B57HMAhVMGz4KHR0QCH8Q_AUIBygC#imgrc=wKC5MNwxHOO4QM%3A

Also, just to clarify a point made in the first paragraph, flight prices from destination to destination are not fixed either. Flights vary in distance traveled and in the destinations that they are headed to. For example,when booking tickets for a common travel time like spring break, we can see that flights from,say, Baltimore to Fort Lauderdale, are more expensive than flights from Baltimore to Boise. Yes Boise is farther away from Baltimore than Fort Lauderdale is, but considering Fort Lauderdale attracts more people from the North East than Boise does, the prices and the frequency of flights are designed in a way that addresses the elasticity of demand.