Airline Ticket Prices

Airline Ticket Prices

Airline ticket prices seem illogical at times, but they are actually based on careful consideration of contributing factors. To observers, the distance between airports are the most important factor, but there are many other facts that are just as important. The cost inputs are a big factor and these are affected by the distance, but the competition plays a critical role.

McAfee (2006) argues that the most important variable is competition. The number of airlines competing on a route has become a critical variable since the deregulation of the airline industry. The most popular routes are highly competitive and it is with these routes that the prices are lower. This will explain why some routes are smaller and subject to higher prices meaning there are fewer airlines that are running those flights.

Price regulation involves the setting of limits (maximum or minimum) on the prices firms may charge for their product. In cases where prices are regulated to limit the potential abuses of monopoly suppliers, regulators may impose price-cap regulations or alternatively revenue-cap regulations. Price-cap regulations typically limit price increases to changes in economy-wide price indices (such as the consumer price index). This approach has the advantage of controlling unreasonable price increases, while retaining incentives for producers to increase profits by reducing their costs. Price regulations may also be employed to set minimum rates in cases where cut-throat competition drives prices below marginal costs for extended periods of time. Minimum rate regulations, for example, could prevent the exercise of predatory pricing in industries with few competitors.

Prior to deregulation, carriers applied to regulators for any rate change; the regulatory agency could approve, deny or vary the changes. However, generally no inflation adjustments were built into rates, and the burden was on the carrier to prove need for changes. Unjust and unreasonable