The Effect of Price Elasticity of Demand in Airline Industry

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The global airline industry is experiencing cold season since the terrorist attack in 2001. Though china’s airline suffered less from the 9-11 effect, price hike of fuel has also plagued the industry. Moreover, in response to the entry of the WTO, Chinese government has phased out regulations upon airline industry and encouraged competition by introducing budget airline. To maintain competitive advantage and considerable profit margin as a domestic leading airline company, China Southern Airlines Co. Ltd. (CSA) needs to design a pricing strategy in accordance with the natures of the distinct markets. The principle of price elasticity of demand will help elaborating how different pricing tactics are applied to different market segments.

What is a Price Elasticity of Demand

The demand for a particular good or service varies depending on a number of factors, including the levels of consumer income, the tastes of consumers, the expectations of future price changes, and the prices of related goods. As a general rule, when other factors on demand remain unchanged, a higher price for a product results in a lower quantity demanded. However, the price sensitivity to demand varies from one good to another and from one market to another. The price elasticity of demand measures the sensitivity of the demand for a good to changes in its price provided that other factors’ influences are omitted. It is defined as the percentage change in quantity demanded caused by a 1-percent change in price. For example, if a 1% increase in price causes a 1.3% decrease in quantity demanded, the price elasticity of demand is 1.3, indicating that the percentage fall in demand is greater than the percentage rise in price. The demand for it is deemed as “elastic”. If, on the other hand, a 1% price rise results in a smaller percentage decrease in the quantity demanded, the price elasticity will be less than one, and demand is deemed as “inelastic”. Furthermore, when demand is price...
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