Price discrimination

Question 1

Using an appropriate diagram, explain why a major airline charges different prices for the same London-Heathrow to New York-JFK flight. 

Question 2

Midland Rail, which is currently aiming to maximise sales revenue, is considering buying the franchise to offer a new rail service from Birmingham to Manchester. If it goes ahead it will be a local monopoly. It has undertaken market research and believes there are two distinct markets. The commuter market, catering for those who live in Birmingham, but work in Manchester, and the ‘casual traveller’ market, catering for those on trips, on visits to friends and university interviews, tourists and business travellers going to exhibitions.

Ticket prices and sales
Midland Rail's market research shows demand from the two markets at various ticket prices.

RETURN TICKET PRICE (£) SALES TO COMMUTERS SALES TO CASUAL TAVELLERS
120 14  
110 16  
100 18  
90 20  
80 22  
70 24 4
60 26 8
50 28 12
40 30 16
30 32 20
20 34 24
10 36 28

Give advice to Midland Rail about its pricing policy, in particular:

  1. Should it have one price for its tickets irrespective of the type of customer, or two prices – one for each market?

  2. You must state the price or prices and you must justify your advice.

  3. Also, support your advice with a graph.

  4. If you argue that two prices are best, give advice about how best to operate this system.