In the Internet age, every website can find out everything about you with just a click of a button. Your age, your location, your race, your income: there are an infinite number of variables that can be determined simply from your browsing history and/or past purchases. These information packets have led to a form of price discrimination: some websites and/or services may now charge each consumer a different price depending on how badly they need the product. In more economic terms, producers now have a simple way to know the elasticity of a consumer's demand. No industry is this more evident than the airline industry. Airplanes and airliners are quite expensive items, they are expensive to fuel, expensive to repair and overall expensive to market and operate. So, for airlines to ensure they are making the most efficient profit they need, they need to examine and diversify their consumers for each flight. By using cookies, click tracking technology and location information, an airline is able to most efficiently calculate a price based on the consumer's tastes and needs and their profit margin. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Elasticity is the measure of need for a product, from something as basic as bread, to large luxury products like sports cars. Elasticity, viewed through the prism of goods, is called elasticity of demand. Simply put, the more necessary a product is and has few or no substitutes, the more inelastic the demand for that item will be. For example, let's say we're looking at gasoline demand and revenue. Gasoline is an essential commodity, used to power a variety of machines, from lawn mowers to cars, and has no real substitute. This means that a change in price, whether upward or downward, will have very little effect on the amount requested. Even if gasoline becomes more expensive, the consumer will still need the same amount to fill up their car to get to work, etc. This means that for inelastic goods, demand and income are symmetrical. When the price increases, so do profits, and this behavior also results in lower prices and revenues. On the other hand, for goods whose demand is elastic, it is the opposite. Elastic goods tend to be easily substituted, or luxury items, and the quantity demanded is very responsive to any changes in price. When the price of an elastic good falls, demand increases significantly and falls when prices rise. Income also acts very differently for elastic goods. When the price of elastic goods falls, income increases, while the opposite occurs when prices rise. However, prices and goods do not live in a static vacuum, without other factors, and this is where income elasticity comes into play. Income elasticity dictates how demand for a product changes depending on the increase or decrease in income. The way each good is affected by changes in income is due to the fact that all goods fall into one of two categories: normal goods or inferior goods. When income increases and demand increases, it means that it is a normal or premium good. However, if a drop in demand for a product is correlated with an increase inincome, this means that this good is less desirable for a wealthier market. These are the fundamental components of income and demand elasticity. These are the concepts that cement the foundation of how a company, in this case an airline, knows how to price and sell its products most effectively. How do these changing demand and income factors manifest in real life? And how does this allow an airline to make the most profit? As an example, let's look at two hypothetical air travelers. Traveler A is a stereotypical 9-5 businessman. Based in New York, he has to go to Los Angeles the next day for a last-minute board meeting. As a middle manager at a prestigious company, we also know that his income is six figures. However, Traveler B is a high school English teacher who lives in a small New York town, just a short train ride from New York City. He has a considerable salary of $60,000 per year and just went on summer vacation. The two travelers search online for flights from New York to Los Angeles. Now, based on this information, the website and therefore the airlines must determine what prices they should set to increase the likelihood of making a sale. In the case of Traveler A, his demand is quite inelastic. He must be present at the meeting in Los Angeles the next day so the price of the plane ticket will not really have an effect on his request. Business people need to get to their meetings, their demand for airline tickets does not fall or rise rapidly based on prices, it remains constant due to the demands of their work. However, this demand still remains slightly elastic due to the factor of different competing airlines. In the airline industry, even though there are a multitude of options, most companies tend to cluster around 5 or 6 large companies like Delta or American Airlines. This means that air transport is an oligopolistic market, meaning that few players control most of the air transport supply. However, as I will demonstrate below, these large players, combined with each consumer's personal data, allow them to charge different prices for each consumer, making them more like a cartel. However, because these companies still have to compete with each other, this ensures that consumer surplus is maintained as they fight to have their products purchased over others in the market. This means that travelers A and B are not liable for a price set by a single manufacturer as would exist in a monopoly (or several collusive manufacturers in a cartel), but rather for a price set by various competing companies. Simply put, he doesn't always buy a ticket from Polar Bear airlines, he has the choice of buying from Pickle, Cheetah or a handful of other flights to his destination of choice, thus making the slightly more elastic demand curve. Now let's look at the case of Traveler B. As a consumer from a less affluent area and with a lower income, his demand for a flight to Los Angeles is not as high as that of Traveler A. He also has less time constraint, having all summer to choose when to go to Los Angeles. All these factors make its demand quite elastic. There is not a fixed price he will pay and nothing else, as is the case with perfect elasticity, but his demand will change significantly depending on how high or low the price of the flight is. Knowing these two factors, the airline would know how to market a more expensive ticket forTraveler A and a cheaper ticket to get the sale to a consumer like Traveler B. However, this is where we get to the heart of the matter. How exactly does the modern airline industry know these different consumers and their likely purchasing habits? The answer is simple, as I said above, these companies change their prices by releasing information about potential consumers online. When it comes to companies, and in this case airlines, collecting more information about their consumers, they use two main methods. Cookies, which are essentially Hansel and Gretel-style breadcrumbs that can tell a site where and what you have done on the web, as well as a consumer's physical location. Thanks to these past interactions and generalizations about your purchasing habits based on where you live, it's never been easier for a business to match a perfect price to each potential consumer. This strategy is particularly attractive to producers with high fixed costs, such as airlines. Airlines have very high start-up or fixed costs. To start such a business, you need a fleet of planes, the space to fly them, as well as staff and fuel, and that's before you even think about marketing or branding. Even though these base costs seem high, their marginal costs, the additional expenses required to put an extra person on a plane, are incredibly low. The price of a bag of pretzels or a can of Coca-Cola is paltry compared to the cost of a plane ticket. This means that the main objective of any airline is to cover these fixed costs and reach the profit point, and attracting these additional sales has a minimal effect on its bottom line. They want to fill their seats and this situation of high fixed cost and low marginal cost is even greater with the advent of the Internet. Now, changing prices results in virtually no marginal costs for the producer. There are no physical posters or labels that need to be reprinted and modified. The software simply analyzes the data quickly and changes the numbers on the screen in the blink of an eye. They know how to create these changes using information gathered from cookies. These identifying information can range from hard drives, to a user's past actions on a specific site. These packages, once downloaded, are capable of tracking users as they view advertisements, different sites and, most importantly, their past purchases. So when user 303 has a strong history of visiting Hawaii every Christmas, it's easier to assess their demand elasticity for that specific set of flights every December. This, when correlated with a user's location, which is typically revealed when purchasing physical goods, or billing, can create an even more vivid picture of a consumer. Once it knows a user's address or zip code, a business can learn the median income in a user's area, the likelihood that they belong to a specific background, and their lifestyle. and their purchasing preferences. These factors are a sign of different demand and, along with internet cookies, they are being used to the advantage of the airline industry. Just as was shown above with hypothetical travelers A and B, now two people who are both on the same flight, and even the same section can have very different prices for their otherwise identical tickets. These new invasive pricing practices were investigated in 2007 by Bill.