South-Western College Publishing - Economics  
Sky-High Airfares
Subject Comparisons with competition, Price discrimination
Topic Monopoly
Key Words Fares, Regulation, Cost, Prices
News Story

In this news story, an editorial writer seeks to dispel the myths surrounding the high prices paid by travelers out of the Minneapolis-St.Paul (MSP) airport. The conventional wisdom is that, because Northwest Airlines carries more than 60 percent of the traffic out of MSP, the fares are 49 percent higher than the average around the country. Many have argued that there should be more government regulation or that more gates should be made available to low-cost airlines.

Northwest responds (and the writer agrees) that the higher fares reflect a greater proportion of business travelers than is the case elsewhere due to MSP being a major business center. Business travelers tend to wish to travel directly to their destination, have flexibility as to when they return, and buy their tickets at short notice, all of which increase the fare. Leisure travelers can book ahead, take longer, and commit to a schedule, and they pay a lower fare in return.

Critics argue the cause and effect are the reverse: that high fares change the passenger mix and reduce the number of leisure travelers. They also believe that business travelers are paying unfair fares.

(Updated June 1, 1999)

1. Assuming that Northwest Airlines approximates a monopoly at MSP, draw a diagram showing its marginal cost, demand and marginal revenue curves.
  a)Show the airline's equilibrium fare and quantity of passenger-miles flown.
  b)The fares in MSP are said to be 49 percent higher than around the country. How do you explain that? Refer to your diagram.
  c)Some argue that there should be more low-cost competition. What would that do to the demand curve and the fares charged by Northwest?
2. Northwest states that its apparently high air fares are due to a large number of business travelers among its passengers who pay higher fares.
  a)Give two economic reasons why Northwest is able to charge different prices to its business and leisure passengers.
  b)On a second diagram of Northwest's monopoly position, show the airline charging different prices.
  c)What is the advantage of doing this for Northwest?
3. a)Why are critics also unhappy with the explanation of high airfares in terms of price discrimination? Consider your diagram.
  b)Should Northwest be blamed for its pricing policies? Give reasons for and against.
Source D.J. Tice, "A Fare Question", St. Paul Pioneer Press, April 18, 1999.

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