This assignment is a small research study to determine if current airline price data provide evidence of the airline practice of 3rd-degree price discrimination. As a foundation for the research, the paper will explain the theory of 3rd-degree price discrimination and how it is implemented in the airline industry. To obtain some limited price data, choose any city-pair and two competing airlines. A network and low-cost-carrier make an interesting comparison, but any airlines of interest are acceptable. For each airline, obtain the four (4) prices for a typical round-trip itinerary with bookings for 1 day and for 1, 2, and 4 weeks in advance of the departure date. Itineraries with closer departure dates are more likely to be purchased by business travelers. Leisure travelers, on the other hand, usually book well in advance of the travel date.
To isolate the effects of advance purchase, the itineraries should depart and return the same days of the week at approximately the same time of day. Try to avoid the influence of holidays or other seasonal effects on demand. Use the airlines’ websites for all fare information.
In your paper, first, explain the theory of 3rd-degree price discrimination illustrated with a graphical model based on Reece and Sobel (2000). Explain how the profit-maximizing price and quantity of seats for passengers traveling for business and leisure are determined. Next, discuss how airlines practice price discrimination. Explain how seats are allocated to various fare levels using expected marginal seat revenue as presented in Smith, Leimkuhler, & Darrow. Then, present your hypothesis, your specific expectation of what the price data will show as evidence of the practice of price discrimination. Follow this with your research methodology including the choice of airlines, the itinerary, class of service and fares, and sources of data. Then, present the data. A simple table or a graph may be the best method for showing the itineraries and fares. Finally, discuss whether the data provides evidence of price discrimination (because of the small sample size, the data may be conflicting). Draw appropriate conclusions. An introduction should begin the paper with the conclusion demonstrating how the objective was met.
There is a standard organization for research papers. Your paper should have the following sections: 1. Introduction, 2. Theory of 3rd-Degree Price Discrimination, 3. Airline Practice of Price Discrimination, 4. Hypothesis, 5. Methodology, 6. Data, and 7. Conclusion.
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