Wednesday, June 25, 2008

Buying Last Minute Train Tickets

Why is it that holiday companies will often sell holiday packages at a huge discount if you buy a few days before. However, if you buy a train ticket the day before, the cost can be 100% higher than if you had bought in advance?

Both are examples of price discrimination where companies are seeking to maximise profits. With package holidays, the companies have already paid for them; they have signed contracts with the hotels. This is like a sunk cost - no matter how many holidays they sell there costs have already been paid. Therefore, the marginal cost of selling an extra holiday package, is pretty close to zero. Therefore, getting any price is better than nothing. Therefore, it makes sense for the travel company to sell at a discount; it even makes sense to sell for less than they bought the holidays for. In this case they are able to minimise their losses. (It is a bit like selling Christmas trees at a discount on Christmas eve)

Because some package holidays are very cheap at the last minute, you might expect customers to wait. However, consumer behaviour suggests people rarely want to do this. When it comes to holidays, price is not the only issue; they are also concerned about getting their preferred destination. Therefore, only a small % of customers are willing to leave it to the last minute and the pot luck of getting a suitable have very elastic demand.

With train tickets, their is a similar marginal cost for selling train tickets however, the last minute buyers of train tickets are liable to have an inelastic demand. Maybe businessmen who find they need to travel at last minute. Therefore, train companies seek to maximise this willingness to pay a high price by charging higher prices. Although it makes sense to fill a train; they maximise revenue by setting higher prices to those willing to pay, rather than cutting prices to ensure a full train.

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