OPTIMUM SEASONAL PRICING OF NORTH ATLANTIC AIR PASSENGER TRANSPORTATION.

• Main Author: JOHNSON, ROGER DENNIS.
• Language: unknown
• Published: Northern Illinois University. 1980
• Subjects: Economics; Commerce-Business; North Atlantic
• Online Access: http://commons.lib.niu.edu/handle/10843/12992; http://hdl.handle.net/10843/12992

Sorry, the full text of this article is not available in Huskie Commons. Please click on the alternative location to access it. 278 p. This study examines the seasonal structure of demand for air passenger transportation in the North Atlantic market to determine the optimal fare structure. The analysis includes a discussion of historical and institutional factors which have influenced both present market structure and pricing policies. Specific attention is directed to the structure and functions of the International Air Transport Association (IATA).The theoretical problems of optimal pricing of air transportation under seasonal demand conditions are discussed in the context of both international trade theory and public utility theory. In the discussion of international trade theory it is noted that optimal pricing entails the use of production taxes or subsidies as opposed to tariffs. From this observation, then, Rudiger Dornbusch's analysis of optimum trade intervention, when the choice of policy tools is restricted, serves as a basis for suggested optimal policy criteria. In addition, the analysis of Edward Tower has shown that if one country makes use of quotas and other countries retaliate with optimum tariffs the market can be expected to move to a position of zero trade. In the case of international air transportation, this would entail each country providing service in proportion to the volume of its citizens traveling overseas. Advocates of capacity controls have often suggested the use of this as a criterion for determining capacity limits. The seasonal application of tariffs, assuming the presence of seasonal differences in elasticities, implies different effects upon the domestic price ratios and the subsequent possibility of income transfers between consumers in the separate periods.The application of public utility theory to the problem of peaking demand in international air transportation suggests that the seasonal structure of fares can vary widely depending upon whether welfare or profit maximizing criteria are followed. In addition, however, the structure of costs (i.e., capacity versus operating costs), and seasonal differences in elasticity further alter the optimal fare structure. The combined effects of stochastic demand and rate-of-return constraints are also considered, using a model based upon the work of Sherman and Visscher, and Crew and Kleindorfer.The empirical analysis attempts to test for the presence of seasonal differences in elasticity of demand through the use of multiple regression analysis. Dummy variables are introduced to test for both intercept and slope changes using a log--linear demand function. The derived seasonal coefficients for fares suggest that demand is relatively inelastic in the peak period and elastic in the off-peak. In addition, examination of the present pricing structure and cost structure suggests that off-peak passengers are subsidizing peak period passengers. Given the relative inelasticity of peak period demand this result appears irrational under the assumption of either welfare or profit maximizing behavior. It is shown that such a pricing policy may be rational, however, if the elements of stochastic demand and rate-of-return constraints are introduced. Given an inelastic peak period demand, the present fare structure becomes rational only if rate-of-return constraints are relatively loose and if expected excess demand is relatively high in the peak period.The application of optimal trade intervention criteria also suggest that such results are consistent with theoretical expectations, given the correct combinations of domestic marginal propensity to import and foreign elasticity of demand for imports. The combined effects of trade intervention through production taxes (subsidies) and capacity limitations can then be expected to move the market to a point of zero trade.