Tuesday, 4 February 2014

So long, and thanks for all the starfish

Price discrimination means charging different prices for the same thing.

It can certainly make people happy, such as students and pensioners who get discounts off travel and other stuff. 

Sometimes it's more subtle and insidious though, like those "loyalty" schemes whose main aim is to stop you defecting to another supplier, which weakens competition and raises the suspicion that these schemes might tend to increase prices.

Other times, like in the diagram below, price discrimination is just a way for the seller to get more revenue. The demand line tracks out the most each person would pay to buy a particular book (or movie or plane ticket etc). Put yourself in the seller's position: if you could only charge one price, it might be P1. But that burns off a lot of potential customers, so you could get extra revenue (the orange rectangle) if you could split them off and entice them in with a cheaper price. 

Notice though, that 
  • to be able to pull this trick, you need to have some market power to start with (P1 is obviously above cost); and
  • to want to pull it, you need to be targeting the low value customers or more generally, people who wouldn't buy without the discount. 

All of which brings me to the Starfish price discrimination plan run by AirNZ, but discontinued yesterday. I joined Starfish last September, when I paid $800 for 1 year of 30% off all airfares on flights to/from regional airports. This looked like a great deal to me and so it has proven. I've almost got my $ back and there are still 7 months to go.

But I'm not in that orange box. I'd be doing this flying anyway because it's part of my job. And it seems that I'm typical of Starfish members. As AirNZ put it 
The viability of the programme relied on the membership base increasing travel frequency but unfortunately this has not occurred in a material way over the three and a half years it has run and the result has been a $14m cost to Air New Zealand.
So there we have it. What the market gaveth, it hath now taken away, and all that's left is AirNZ's market power on regional routes.

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