Third-Degree Price Discrimination for Airline Tickets
According to Table 2.2, the estimated price elasticity of demand for coach class airline tickets for business travelers is EQB,PB = -1.15,while for vacation (leisure) travelers it isEQV, PV = -1.52. 15 Suppose an airline facing these demand elasticities wants to use third-degree price discrimination to maximize profit, by setting the price of a business travel ticket to PB and the price of a vacation travel ticket to PV. Also suppose that the airline faces the same marginal cost MC for both types of travelers.
Use the inverse elasticity pricing rule [IEPR; see equation (11.4)] to determine the ratio PB/PV.