Which of the following best explains how airlines practice price discrimination?

• A. Airlines set a single price for all seats on a flight regardless of when or how tickets are purchased.
• B. Airlines base all ticket prices solely on the distance traveled, with no other considerations.
• C. Airlines only offer discounts to frequent flyers and never to other customers.
• D. Airlines charge different prices for the same flight based on factors such as booking time, customer type, and flexibility of the ticket.

Answer: (D)

Verified step by step guidance

1. Understand the concept of price discrimination: it occurs when a firm charges different prices to different customers for the same product or service, based on their willingness or ability to pay, rather than differences in cost.
2. Identify the key characteristics of airline pricing: airlines often vary ticket prices depending on factors such as how far in advance the ticket is purchased, the type of customer (e.g., business vs. leisure travelers), and the flexibility or restrictions of the ticket.
3. Recognize that charging a single price for all seats or basing prices solely on distance does not constitute price discrimination, because these approaches do not differentiate prices based on customer characteristics or willingness to pay.
4. Note that offering discounts only to frequent flyers is a form of price discrimination, but it is limited and does not capture the full range of pricing strategies airlines use.
5. Conclude that the best explanation is that airlines practice price discrimination by charging different prices for the same flight based on booking time, customer type, and ticket flexibility, which allows them to maximize revenue by capturing consumer surplus.