256 CHAPTER 17 PRICING STRATEGY BOX 17.1 EASY PRICING Getting the most revenue from the demand curve Low-cost airlines, such as easyJet and Ryanair adopted an plane is given by the total grey and pink shaded areas. approach to pricing in the late 1990s that was novel at the If, by contrast, a single price were charged to fill the plane, time, but is now being increasingly used by other airlines and in other industries. The approach is a form of price this would have to be P1, giving total revenue of just the pink area, with passengers gaining consumer surplus of discrimination. the grey area. The principal is simple: with a fixed number of seats per flight, as the seats are sold, so the prices go up. Thus the The easyGroup first few seats are sold at a really low prices. Indeed, when Stelios Haji-Ioannou, the original owner of easyJet, founded particular flights first come on sale, many people go online the easyGroup holding company of 'easy' subsidiaries in very quickly to try to get the lowest priced seats. This rush to 1998. In addition to easyJet, these include or have included purchase seats at reasonable prices helps to drive sales and easyCinema, easyMobile and easyCruise amongst others. gets people to commit to a purchase when otherwise they In several of these easyGroup companies prices rise as sales may have waited and perhaps changed their minds. increase, just as with easyJet. Take the case of easyCinema. The idea is also to take advantage of the different prices Prices started very low and then rose as the cinema filled people are willing to pay. Business passengers, for example, up for any given screening. EasyCinema customers had no may be willing to pay very high prices (or at least their tickets: they booked online and printed out a bar-coded employers may) but might want to book a flight at the last entry pass.. minute. The pricing model means that with a plane that is Unfortunately, for Mr Haji-Ioannou, the easyCinema venture nearly fully booked at that stage, the price will be high and failed. Faced with an effective cartel of film distributors, the airline will be able to charge a price closer to the business which chose not to sell to the cut-price easyCinema, it could passenger's willingness to pay. only show old or less popular films. It was forced to close In fact, in the perfect case of such a pricing model, each in 2006. passenger is paying the maximum they would be willing to Other similar ventures, such as easyCruise and easyMobile pay - a case of first-degree price discrimination. This means have also closed or been sold. Nevertheless, the number that all the consumer surplus (see pages 83-4) that would of ventures in easyGroup now number over 20, including have gone to the consumer, instead goes as revenue to the easyCar, easyVan, easyOffice (serviced office rental), airline. This is illustrated in the diagram. Assume that the easyJobs (employment agency), easyGym and easyBus plane has 156 seats (the typical easyJet Airbus A319-100 (airport transfers). configuration) and that the demand for seats is given by the demand curve (D). If each passenger pays what he or But the most successful of the easyGroup businesses she would be willing to pay, the total revenue from a full remains easyJet, the UK's largest. It has seen turnover grow in every year since 2000. Its load factor has steadily Demand for seats on a low-cost airline increased, with an average seat occupancy in 2012 of 88.7 per cent. Ticket 4 Unlike Ryanair, it has targeted the business market and flies price to main airports rather than small ones in remote locations. The pricing model particularly suits easyJet's market, with holiday makers being able to take advantage of low-priced seats booked a long time in advance and business travellers having the flexibility of buying tickets at the last minute, but at much higher prices. P 1. Distinguish between first- and third-degree price discrimination. 2. Is easyJet's pricing model one of pure first-degree price discrimination? Explain whether or not the total revenue for a full plane will be the full amount shown by the grey and pink areas in the diagram. O 156 Passengers 3. What other policies of easyJet have made it so successful