Business Travelers Tend to Be Less Price Sensitive Than Leisure

question 2

Essay

Business travelers tend to be less price sensitive than leisure travelers.Knowing this,airlines have discovered that extra profit can be generated by using separate pricing for these two types of customers.For example,airlines often charge more for a midweek flight (mostly business travelers)than for travel that includes a Saturday-night stay (mostly leisure travelers).Suppose an airline has estimated demand vs.price for midweek travel (mostly business travelers)and for travel that includes a Saturday-night stay (mostly leisure travelers)as shown in the table below.This flight is served by a Boeing 777 with capacity for 300 travelers.The fixed cost of operating the flight is $30,000.The variable cost per passenger (for food and fuel)is $30. (a)One function that can used to estimate demand (D)as a function of price (P)is a linear demand function,where D = a - bP.For positive values of a and b,this will give lower demand when the price is higher.However,a nonlinear demand function usually can provide a better fit to the data.For example,one such function is a constant elasticity demand function,where D = aP^b.For positive values of a and negative values of b,this also will give lower demand when the price is higher.Graph the above data and use the Add Trendline feature of Excel to find the constant elasticity demand function that best fits the data in the above table for midweek demand,Saturday-night stay demand,and total demand (b)For this part,assume that the airline charges a single price to all customers.Using the demand function for total demand determined in part a,formulate and solve a nonlinear programming model in a spreadsheet to determine what the price should be so as to achieve the highest profit for the airline.(c)Now assume that the airline charges separate prices for midweek and Saturday-night stay tickets.Using the two demand functions for midweek and Saturday-night stay tickets determined in part a,formulate and solve a nonlinear programming spreadsheet model to determine what the prices of the two types of tickets should be so as to maximize the profit for the airline.d)How much extra profit can the airline achieve by charging higher prices for midweek tickets than for Saturday-night stay tickets?

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Definitions:

Buying Process

The series of steps a consumer goes through, from recognizing a need or desire to the final purchase decision, including information search, evaluation of options, and post-purchase evaluation.

Modified Rebuy

A buying situation where an organization makes changes to its previous purchase orders, involving modifications in product specifications, prices, or suppliers.

New Buy

A purchasing situation in which a buyer purchases a product or service for the first time, presenting a significant decision-making process.

Buying Center

A group of individuals within an organization who are responsible for making decisions about significant purchases, evaluating options based on the company's needs.