Airline Industry vs. the Coffee Market

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This case details the difference between coffee, an inelastic product and airline travel, an elastic product. Thanks to the addictive nature of coffee, consumers prioritize this good and the retail coffee industry has been able to push the envelope on price. On the other hand, the history of the airline industry has shown that air travel is thought of as a lavish good and only when feasible will consumers purchase airline travel. Consumer preferences reflect coffee as a necessity and airline travel as a luxury; therefore, the two industries have opposing price responsiveness. Only airlines with a low cost structure have stayed in business because price is the demanding factor. Consumers find readily available substitutes and air travel is not demanded daily, so they are shopping for the best price. This reflects a small change in price leading to a sharp change in the quantity demanded; the quantity demanded is exceptionally responsive to price. The airlines lower prices to increase revenues because the elasticity of demand for their product is critical to pricing policies. The competition is fierce in the airline industry. There are surplus suppliers, many substitutes, and competition bleeds into other industries; therefore, buyers can chose from a wide selection without losing much utility. Consumers can easily choose another airline or chose outside of the industry to fulfill their want to travel. The availability of close substitutes by utilizing another medium to visit or travel, such as video-conferencing, and stay-cations (where consumers decide to stay home and enjoy local fun instead of taking a long, faraway vacation) and the option of not traveling reflect the more elastic demands of the industry. To overcome these market conditions airlines have tried to itemize their customers by charging a higher price for business travelers who have relatively inelastic demands and charge a lower price for vacation travelers who have relatively elastic...
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