Southwest Airlines

Paper Summary:

This paper focuses on the idea that with the relationship Southwest Airlines has with substitutes, profits can be gained by pricing strategically across business and economy classes. The hypothesis examined is that Southwest focuses more on price discrimination, and has a clearer price difference between the two classes. It contends that by increasing airfare for the business class and continuing with the low price model for the economy class, Southwest would also be expanding its opportunity and increasing its revenue.

Outline:
Introduction
A Model of Price Discrimination: Opportunities Related to Substitutes for Southwest Airlines

From the Paper:

"Price elasticity of demand refers to the percentage in quantity demanded due to a percentage change in price (McConnell, Brue, and Barbiero, 2002, p 145). If demand is highly elastic as it is for casual travelers, lower prices will cause total revenue for Southwest to increase. Look at Figure 1 below; even though price decreased by a smaller amount, movement from P2 to P1, the quantity demanded increased by a very large amount, Q2 to Q1 [compare the red and blue areas to see the difference]. So the recommendation based on the opportunity related to the closeness of substitutes is that Southwest Airlines continues to keep prices low for the casual travelers."

Sample of Sources Used:

• McConnell, C. and Brue, S. (2005). Macroeconomics 16th Edition. New York: McGraw-Hill.
• McConnell, C., Brue, S., and Barbiero, T. (2002). Macroeconomics 9th Canadian Edition. Toronto: McGraw-Hill.
• Miller, R. (2006). Economics Today: The Micro View 13th Edition. New York, Pearson Publishers.
• Reed, D. (2006). "Airline Industry Poised for Shake-up"? USA Today. Retrieved on April 9, 2007 from www.usatoday.com/money/biztravel/2006-12-13-airline-mergers_x.htm

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