If you and I go to a fast food chain, we’ll each pay the same price for a burger. But rarely do two people pay the same price for an airline ticket, even if they’re flying to the same destination. N.C. State University economist Mike Walden explains why this is the case.
“Well, I’ll leave (whether this is) fair up to our, our listeners, but the why, I think, is fairly straightforward … in the sense that every seller knows that individual buyers value products to a different extent. And so they would like to try to sell products individually to, to people and charge each person the maximum that that person would be willing to pay.
“Now in some situations — as you mentioned, the fast food restaurants — that’s not very practical to do or it’s very costly to do. And so in those cases, we all pay the same price. And those people, for example, who value burgers more are actually getting the bargain.
“But for other kinds of purchases, it is easier to separate people into different categories and charge them different prices. Airlines — that’s an excellent example. For example, traditional airlines knew that business travelers are willing to pay more to fly than leisure travelers. But how would they separate those two groups? Well, that’s where they invented — the airlines did — that the Saturday night stay. Although it was not perfect, typically a leisure traveler would stay over Saturday night, and, therefore, people who did that got the lower rate, whereas the business traveler who traveled only during the week, they paid the higher rate.
“So, this is a typical technique called market segmentation. It’s something that — I think … — if consumers are aware that exist, we can use that to our benefit to try and avoid the higher price and get the lower one.”