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3.2 Discussion: Price Discrimination and P.E. of Demand

Conduct a critical analysis of a posting by two of your classmates by the end of the workshop. The topic of your discussion response should be your classmate’s posting and should be written as if you were reviewing his/her posting in an academic journal. Your discussion response should, therefore, answer the following questions as applicable:

• Were your classmate’s arguments articulate and logical? Were the facts correct?
• Was the interpretation your classmate provided reasonable and consistent with experts in the field? Was your classmate consistent with both the substance and intent of his/her references?

The focus for your critical analysis is not whether or not you agree with your classmate, but how well his/her position was presented. Each response should be at least 200 words in length and cite two academic sources.  Please strive to make your discussion responses ones that cause iron to sharpen iron.

Peer Review 1:

The main concept behind pricing inequality is that a business is attempting to make use of distinct market price conductivity. If there are a rather inelastic market for certain individuals, it means they are able to pay a premium amount. It will boost its sales and earnings if the organization can pay better rates on these customers. Other customers will be more pricing-sensitive (elastic demand) but will react to special deals and discounts on rates. If it can isolate these customers and thus decrease their surplus value, the business would benefit.

1. Time of buying the ticket for a journey: There’s really no hard rule, but it appears to be better value for money if you purchase a ticket a few months ahead of time. If the demand for a particular plane is large, the air carrier will start to raise the cost of that flight. This suggests that some of those able to pay a premium price will purchase the remaining seats (inelastic demand). The carrier will be doing the reverse and drop the cost if a domestic plane is not performing quite well. This lowered price draws further price conscious individuals which mean that perhaps the flight can fill up.
2. Unsocial hours cheaper: These flights would appear to be cheaper since those flight times become less common. If you take a weekend’s holiday, for instance, On Sunday, most citizens would like to return late. Such late Friday flights are much more costly that Sunday planes throughout the morning hours.
3. Extra money asked for more leg space: Emirates sold a seat with three mm of leg room for £ 30 in premium economy. I leapt at the bid at 185cm. It’s nice £30 expenditure for me. With nearly 40 percent of seats in premium economy being filled up with additional legroom seating, it was very common. Since it’s a somewhat unique commodity, it’s not exactly pricing disparity, however the airline is willing to offer higher premiums to those customers with somewhat less inelastic. You can go to the opposite side and spend £ 15,000 as a first air tickets, in comparison to the three mm of additional legroom (James, 2012).
4. Traveling in the peak hours: It would be far more costly to fly at peak hours. Travelling through the week is one good example. I once looked at flight costs in August via New York to London. The cheap fares was well over £ 1,000 between Monday through Friday am surprised at the prices. Then, once I moved the wording to Wednesday, the price dropped to £ 350. The explanation is that the buyers are entrepreneurs who fly from Monday to Saturday. Their request appears to be more relatively elastic (because it is paid for company expenses). You are much more cost resilient and get a more flexible market because you are more relaxed and able to fly on the weekends. Based on the period of the year, airline tickets also differ (Darin, 2007).

References

• James Peoples. (2012). Pricing Behaviour and Non-Price Characteristics in the Airline Industry: Vol. 1st ed. Emerald Group Publishing Limited.
• Darin Lee. (2007). The Economics of Airline Institutions, Operations and Marketing. Elsevier Science Ltd.

Peer Review 2:

The strategy of selling the same product or service at different prices to a customer based on the maximum amount he could spend is defined as price discrimination. The means of commute have significantly changed as we progress. What was considered to be impossible is possible today. The airline industry is one such sector that makes traveling quicker and affordable to every consumer. However, it is evident that to gain revenue, airline companies implement legal pricing strategies to make maximum profits of each seat. The key to the pricing strategy depends on the duration/days prior to the departure date. Let’s consider an example that will illustrate how it is achieved.

Consider a one-way United Airlines Flight traveling from Chicago ORD to Los Angeles LAX on March 29, 2021. According to United Airlines, the advance bookings for a flight will be available 330 days before the travel date. The pricing strategy varies by origin, destination, departure and arrival time, season, demand, and competitors. In our case, United airlines can legally modify a seat’s price based on the factors discussed above. Each flight is divided into First Class, Business Class, Economy Class, and Basic Economy. Every class has its features and perks, and the customer chooses based on his budget and urgency to travel. So a customer is divided into groups based on their needs. The airlines would release only a few seats per month to capitalize on the price as the departure date nears. A customer who travels in a first and business class does not care about how much the ticket price is as he could afford it. However, some customers are price specific and would book their flights early to save money. As the departure date approaches, the airlines would increase the price as only a few seats are left. The price discrimination in this aspect is legal as the company is determining its prices based on the supply and demand criteria.

Justification

The airline industry justifies its price discrimination based on the following criteria. To generate revenue and cover the costs of the flight. It is legal to discriminate the prices based on the customer’s needs and travel plans. Operating a one-way flight incurs enormous expenses to the company in fuel, maintenance, ground, and support staff. To balance all these expenses, the airline industry discriminates the prices based on the duration/days prior to the flight.

References and Citation

1. Jovana Stanisljevic Professor in International Business. (2020, March 11). A traveller’s guide to airline price discrimination. Retrieved January 21, 2021, from https://theconversation.com/a-travellers-guide-to-airline-price-discrimination-98329
2. Pettinger, T., Augustine, A., Olabanji, O., J., & Newcomb, M. (2018, January 08). Airline price discrimination. Retrieved January 21, 2021, from https://www.economicshelp.org/blog/7767/business/airline-price-discrimination/#:~:text=How%20does%20an%20Airline%20practise,1.&text=If%20demand%20for%20the%20particular,higher%20price%20(inelastic%20demand).

3.4 Discussion: Aggregate Expenditure Model

Conduct a critical analysis of a posting by two of your classmates by the end of the workshop. The topic of your discussion response should be your classmate’s posting and should be written as if you were reviewing his/her posting in an academic journal. Your discussion response should, therefore, answer the following questions as applicable:

• Were your classmate’s arguments articulate and logical? Were the facts correct?
• Was the interpretation your classmate provided reasonable and consistent with experts in the field? Was your classmate consistent with both the substance and intent of his/her references?

The focus for your critical analysis is not whether or not you agree with your classmate, but how well his/her position was presented. Each response should be at least 200 words in length and cite two academic sources. Please strive to make your discussion responses ones that cause iron to sharpen iron.

Peer Review 1:

Based on the information provided by the Federal Reserve, it is understood that the country is currently oscillating between trough and recovery state. After reading the available data, the overall economy of the country is showing steady progress and though we aren’t doing as great as the pre-covid economic progress we are still managing to see a spike after the recession. However, it is unfair to call that the whole country is facing the same fate as many districts couldn’t manage to find growth in both manufacture, and retail activities. Even if we continue to look at the agricultural sector and energy activities from the lens of recovery, it still paints a low level growth. This is not because of the decreased demand, but the decreased labor can affect a lot in these sectors. We all are aware of the reduced day care, and daily labor in this pandemic and it is nowhere considered an easy task to revive the condition back to the one existed prior to the pandemic (Thompson, 2020).

The aggregate demand-aggregate supply model depicts what decides the demand & supply for the country’s economy at a macro level. It is nothing but discussing the GDP and the factors associated with it. So, it is quite clear that unless both the demand and supply are at equal levels, it is impossible to attain “equilibrium”. It takes a significant growth in the price level to increase the total supply of the output and thus it can meet the overall demand of consumers in our country. Many tend to have a misconception that the AD AS is a micro economics model, and that confusion generally arises due to the analysis of goods, services and labor in the micro economics. Though we have a resemblance, the factors and the reasons behind bring a huge difference in both. If equilibrium is attained at a flat range of aggregate supply, then it can note that the economy is not functioning at its maximum and favorable GDP is not attained (Meyer¸1998).

As per the Federal Reserve report, the “price-pressure” is supply-driven. If not completely, it still held the ability to reduce the ability to supply for the necessary demand in every industry. The rise of input prices plays an important role in the price pressures, and selling prices are not at par with them. Due to this, the price pressure is effective if not as much as it is in the last year. We are slowly slipping into a recovery mode and it is wiser to assume that these kinds of pressures can be still considered modest as per the available report. It also explains how the prices of structural lumber and similar goods had seen a rise and this is completely because of the demand surges and supply-chain distributions. The other factor affecting the same is the freight charge.

The housing market is holding up really when compared to the commercial real estate amidst the Covid pandemic. It can be considered as a favorable moment in the economy and its recovery. This is certainly because of an underlying and unnoticeable demand in the housing sectors which couldn’t be suppressed despite the overwhelming environment out there. The sellers are extremely happy at how the tables remained still un turned at least for them, and though they couldn’t expect a rise in the prices it is still considered fair for them to receive an expected amount. In fact, the speed of the recovery in the housing sector is quite surprising as it is estimated to suffer for a longer duration after the pandemic. The only thing that can slow down the house sales is the increasing demand but not a reduced supply. However, the external factors which can affect these sales in the residential real estate are the increased lumber prices and the levels of safety, comfort seemed by the existing owners.

References

• Thompson, H. (2020). These Times. New Statesman, 149(5511), 10.
• Meyer, L. H. (1998). Federal reserve policy and transformation of the US banking system. North American Journal of Economics & Finance, 9(2), 203.

 Peer Review 2:

Position of the country in the Business Cycle

After pandemic, organizations have developed strategies to regain their demand in the market. As a result, the supply and demand chain started catching pace. However, based on current analysis, the country’s position in the business cycle is in a recovery state. The reason is that the losses incurred during the pandemic were huge. After the markets were open, the shortage of supplies, labor, and demand was significant in the private goods and services sector. The federal government has spent huge money providing aid to the individuals and organizations affected due to pandemic. A week ago, United Airlines disclosed its earnings in the 4th quarter of 2020, and its revenue fell by 64%. The company predicts it would completely recover to the state before the pandemic by 2023.

Aggregate Supply and Demand

The aggregate supply and aggregate demand are two significant contributors to the economy. The equilibrium is attained when the aggregate demand is equal to the aggregate supply. In other words, as the demand for a product increases and the supply output can meet the demand, then there exists an equilibrium. If there are surplus output and no demand for the product or service, it results in the decline of GDP.

Price Pressure

The price pressure alluded to the Federal Reserve information is both demand and supply-driven. After the pandemic, the demand for the residential sector arose. However, the output supply of lumber is low, causing an increase in the price of input to the constriction company. As a result, the construction company has to raise their service prices to meet the input costs. The following cascading effect creates price pressure on an organization or sector. Where they have to fix a price under immense pressure in such a way that will balance the input costs and competitor offerings.

Trends of the Housing market

During the pandemic, the housing market has skyrocketed. The economists believe it’s a game-changer in the real estate industry. The reason being that during the pandemic majority of the population was working from home. It was convenient for them to spend time with their family and teach their kids regularly. The organizations were running as swiftly as possible even though their employees were working from home. So the majority of the buyers decided to buy their first house in the suburbs as there is no need to commute daily to downtown. The low mortgage also encouraged the buyers to invest their money into buying a home.

References and Citation

1. Boundless. (n.d.). Boundless Economics. Retrieved January 25, 2021, from https://courses.lumenlearning.com/boundless-economics/chapter/introducing-aggregate-expenditure/#:~:text=A%20shift%20in%20supply%20or,adjust%20each%20other%20toward%20equilibrium.
2. Lesliejosephs. (2021, January 22). United’s losses mount but airline expects to surpass 2019 margins in 2023. Retrieved January 24, 2021, from https://www.cnbc.com/2021/01/20/united-airlines-ual-earnings-q4-2020html.html
3. Solovieva, D. (2020, October 20). Behind real estate’s surprise 2020 boom and what comes next. Retrieved January 25, 2021, from https://fortune.com/2020/10/20/real-estate-coronavirus-pandemic-home-buying-zillow-redfin/