‘You Paid How Much for That Ticket?’

Have you ever been the victim of discrimination? That is, have you ever been treated differently from other people based not on your individual merits but because of your age, your gender, or your race? Not sure what discrimination is? Visit https://www.merriam-webster.com/dictionary/discrimination for a definition of discrimination.

With a partner or as a group, discuss a personal experience related to discrimination. What does the term ‘categorically’ mean in the definition of discrimination? What are the common characteristics of these experiences?

In this lesson you will:

• Define the term discrimination.
• Compare and contrast price discrimination with age discrimination.
• Apply the concept of price discrimination to the movie theater market.

Now you might be wondering just what discrimination has to do with a web site dedicated to economics, but did you know that discrimination is sometimes at work in the prices you pay for goods and services? Consider the situation of two individual who want to travel from New Jersey to Seattle for the weekend on Airline X. Each person buys a ticket for the same airplane, in seats 11-A and 11-B, respectively. Jose buys his plane ticket online after he receives an e-mail posting from the Airline X advertising a bargain price for a flight to Seattle. Jose has friends in Seattle he would like to visit, and this weekend is as good as any. Kelly, on the other hand, is already at the airport and buys her ticket directly from Airline X. Kelly has just been directed by the company she works for to be in Seattle for an important Saturday morning meeting. Both people are buying the exact same service (transportation to Seattle), and they will be sitting in seats right next to each other. Explain why it would be reasonable to assume that both tickets will cost the same amount. Do you think Jose and Kelly actually paid the same amount for their tickets? Go to https://plus.maths.org/content/os/issue37/features/currie/index to read about an actual case of paying too much for a service.

You have just read about a case of price discrimination. If Jose represents the online purchase, how much did he pay for his plane ticket to Seattle? If Kelly represents the person at the airline counter, how much did she pay for her plane ticket to Seattle? How much more did Kelly pay for the same ride to Seattle?

How is Airline X able to charge different prices for an identical ride to Seattle? Do you think this is a good business practice?

Discussion Questions

View Interactive Activity

1. Define price discrimination.
2. Describe the difference between Jose’s and Kelly’s need to travel to Seattle.
   
3. Is it likely that Jose would pay $1,000 for a plane ticket to Seattle?
4. Why?
5. Why is Kelly willing to pay $1,000 for plane ticket to Seattle?
6. If you buy a $200 ticket from Airline X on the Internet, what keeps you from reselling it to Kelly for $500? 
7. Is price discrimination a good business practice?

Arbitrage is the technical term for the practice of profiting in price differences.

To summarize, Airline X is able to practice price discrimination because of three critical factors.

1. The airline can separate customers into categories.
2. Customers have different abilities to pay different prices.
3. The airline has market power, which is the ability to influence prices and output in a market, as in blocking resale of airline tickets.

Price discrimination occurs in a number of other markets. To find out more about price discrimination, read Disney Discovers Peak Pricing.

Based on the information in the article, discuss the following questions:

1. How do airlines keep business travelers from purchasing economy-priced seats?
   
2. Name two markets other than airlines that practice price discrimination.
3. Why are some types of price discrimination considered good for the economy?
4. Explain how a movie theater night practice price discrimination. Include in the explanation a discussion of the three critical factors for price discrimination.
5. As a group, brainstorm several other examples of price discrimination.

In some cases price discrimination is illegal, as detailed in the The Robinson-Patman Act.   Visit this link below to explore the circumstances in which charging different prices to different customers is illegal.