Why Is Airfare Cheaper If Bought Earlier Rather Than Later?

Why is airfare cheaper if bought earlier rather than later?

Airline companies are charging customers greater if they buy there tickets under short notice, rather than if they had booked well ahead. A Quantas Melbourne to Adilade, supersaver ticket departing in a week costs $250, the price of a similar ticket had it been booked six months prior is $117, a price deduction of $133 on the $250 ticket, corresponds to almost a fifty percent price reduction for the same service. An increase in the price a ticket will cause a movement to the left of a demand curve this results in a decrease in the amount of airline tickets traded, therefore by increasing the cost of a ticket airliners pose the risk of revenue loss; if they are unable to sell enough tickets to cover their opportunity cost of that flight. However airline companies continue to up the cost of tickets the closer it gets to the scheduled departure date.

Airline companies continue to do this because they know they can sell their tickets and can therefore increase there profit gain. A rational customer will only invest in a service if and only if their value for the service, known as the marginal benefit is greater than their value of the cost incurred by purchasing the good, known as the marginal cost. Airliner economists aim to reduce the producer surplus which is the gap between marginal benefit and marginal cost. Which in turn results in an increase in the companies own surplus. Airliner economists have used this scheme of increasing ticket prices near departure date as a way of segmenting the market into to groups, based on the magnitude of their perceived marginal benefit. The economists know that the customers buying tickets close to departure date are more likely to have a greater willingness to pay than those who booked ahead. This is because customers buying soon before are likely to be travelling to an unorganised or sudden event such as a funeral or an important business meeting, which tend to attract a much greater marginal benefit. The airliner can now direct the premium price to those select customers who have a greater marginal benefit. The price increase is sure to increase the customers opportunity cost of purchasing the ticket, therefore if the customers still values the ticket more than the cost, they will make the purchace. This ploy effectively minimises the customer's surplus and hence maximising producer surplus and thus maximising the revenue generated from the flight.