South-Western College Publishing - Economics  
Class Divisions Become More Pronounced
Subject Monopoly and Oligopoly, Price Discrimination
Topic Product Markets
Key Words Fares
News Story Airlines are taking a number of steps to improve the quality of flying for their elite passengers. There often are more check-in staff at the airport for the best customers. Their bags are likely to be given priority, and VIP lounges are being spruced up. On board, more legroom is being created for business-class passengers, and they may be able to take more bags on to the plane. They receive more frequent-flyer miles on some airlines. Those customers paying full coach fares but who are not upgraded to business-class tend to receive prime seats in economy class.

The losers are those with discounted tickets who have to sit in the back of the plane in relatively cramped conditions and with little or no food service. The airlines retort that they are merely giving more benefits to those who pay more. They are usually paying higher fares because they have to travel mid-week or at short notice.
(Updated June 5, 1998)

Questions
  1. The airlines are able to charge different fares to business and leisure passengers in part because they have different price elasticities of demand.
    1. Which group has the highest elasticity of demand?
    2. Why is the price elasticity of demand generally different for the two groups?

  2. The distinctions between economy- and business-class travel are becoming more pronounced.
    1. What effect will this tend to have on the price elasticity of demand for business-class travel? Explain why.
    2. What will be the effect on the price elasticity of demand for economy-class travel? Explain your answer.

  3. Why would the airlines wish to accentuate the differences in price elasticities of demand?
Source Laurence Zuckerman, "Airlines Coddle the High Fliers At Expense of the Coach Class," New York Times, April 1, 1998.

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