Saturday, September 29, 2012

Airlines and Two Part Pricing

The New York Times reports that US Airlines have increased the number (an amount) of fees they charge customers, and along with increasing consolidation has resulted in airlines becoming more profitable.  Here I want to focus on the impact that added fees have on profits.  As suggested in the two-part pricing model, a profit-maximizing firm has an incentive to charge fees to increase their profits, and the amount of the fee is based on the consumer surplus of their customers.  While airlines may not be setting the fees exactly as the model predicts, the model is rather simplified as compared to the details of the airline industry.  Either way, we have a nice example of how economic theory and industry analysis are related.

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