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LAILATUL BADARIAH KASSIM ECN 4159 131164

PRICING STRATEGY OF AIR ASIA

A seller price discriminates when it charges different prices to different buyers. The ideal

form of price discrimination, from the seller's point of view, is to charge each buyer the

maximum that the buyer is willing to pay.1 Price discrimination involves market

segmentation and extracting consumer surplus from buyers and turning it into additional

revenue and profit. The key to price discrimination is to exploit the fact that different

consumers have a different willingness and ability to pay for goods and services.

Most airlines use differentiated pricing, a form of price discrimination, in order to sell air

services at varying prices simultaneously to different segments. Factors influencing the

price include the days remaining until departure, the current booked load factor, the

forecast of total demand by price point, competitive pricing in force, and variations by

day of week of departure and by time of day. Computers allow airlines to forecast, with

some precision, how many passengers will actually fly after making a reservation to fly.

This allows airlines to overbook their flights enough to fill the aircraft while accounting

for "no-shows," but not enough to force paying passengers off the aircraft for lack of

seats.

Air Asia use differential pricing which is selling the same airline ticket to different buyers

at different prices. The most common form of differential pricing is second-market

discounting where different prices are charged to different segments of consumers. New

airline pricing strategies are used to determine the selling price for new destinations that

are about to be introduced in the flight route. The new airline pricing strategies that are

1
Price Discrimination at http://ingrimayne.com/econ/Monopoly/

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LAILATUL BADARIAH KASSIM ECN 4159 131164

commonly employed are penetration pricing. Penetration pricing strategies attempt to

stimulate demand and product trial by offering the fare price for new destinations at a low

price.

Psychological pricing strategies are based on image the airline wants to project for the

fare. Prestige pricing, reference pricing, odd-even pricing and traditional pricing are all

different types of psychological pricing. In this case, Air Asia use Odd-Even pricing

which is setting prices at odd numbers (e.g. RM9.95) to denote a lower price or a “good

deal” or setting prices at even numbers (e.g., RM10.00) to imply higher quality.

Price discrimination requires market segmentation and some means to discourage

discount customers from becoming resellers and, by extension, competitors. This usually

entails using one or more means of preventing any resale, keeping the different price

groups separate, making price comparisons difficult, or restricting pricing information.

Airlines use several different types of price discrimination, including seasonal discounts,

incentive discounts, and even general prices that vary by location. The price of a flight

from say, Malaysia to Beijing can vary widely if one buys the ticket in Malaysia

compared to Beijing (or Thailand or Myanmar or elsewhere). In online ticket sales this is

achieved by using the customer's credit card billing address to determine his location.

The purpose of price discrimination is generally to capture the market's consumer

surplus. This surplus arises because, in a market with a single clearing price, some

customers (the very low price elasticity segment) would have been prepared to pay more

than the single market price. Price discrimination transfers some of this surplus from the

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LAILATUL BADARIAH KASSIM ECN 4159 131164

consumer to the marketer. Strictly, a consumer surplus need not exist, for example where

price discrimination is necessary merely to pay the costs of production. 2

For certain products, premium products are priced at a level that is well beyond their

marginal cost of production. For example, Air Asia may price regular ticket fare at

RM9.99, but "premium" fare at RM19.99. By providing a choice between a regular and

premium product, consumers are being asked to reveal their degree of price sensitivity (or

willingness to pay) for comparable products.

Airlines and other travel companies use differentiated pricing regularly, as they sell travel

products and services simultaneously to different market segments. This is often done by

assigning capacity to various booking classes, which sell for different prices and which

may be linked to fare restrictions. With the rise of the Internet and the growth of low fare

airlines, airfare pricing transparency has become far more pronounced. Passengers

discovered it is quite easy to compare fares across different flights or different airlines.

2
Wikipedia at http://en.wikipedia.org/wiki/Price_discrimination