Instructions: Read the following scenario below and offer a comprehensive soluti
ID: 1226113 • Letter: I
Question
Instructions: Read the following scenario below and offer a comprehensive solution to each problem. Also write a solution and which you do the following for each case:
Analyze the key economic issues in the case.
Recommend three different business solutions to the case using managerial economic models and methods.
Justify the role of managerial economics by identifying the metrics you would use to assess the success of your decisions.
Scenario:
In 1992, American AIrlines (AA), the market share leader in the airline industry, announced a new pricing strategy--Value Pricing. AA believed Value Pricing would adress customer complaints and help reverse operating losses by stimulating demand, increasing market share, and reducing costs. American narrowed the number of possible fares from 500,000 to 70,000 by classifying each into one of four classes (first class, coach, discounted 7 and 21 day purchase) an began pricing based on flight length. Thesee changes resulted in lower list prices for both business and leisure travelers.
According to AA, the purpose of Value Pricing was to create "simplicity, equity, and value" in its prices. By simplifying the pricing structure, AA was stabilizing price fluctuations as well as establishing a price floor. The new system set firm prices based on restrictions and miles flown and eliminate any corporate discount programs. Most importantly, American believed the new fare structure created through Vaue Pricing would increase volume on thei planes (raising load factors). AA believed Value Pricing would drive an increase in overall eman through its effort to stimulate travel and economic activity. American also believed these prices would allow AA to increase its market share.
Explanation / Answer
a. The company here is trying to stimulate demand for the airline through price discrimination by charging different prices for different class of consumers. It is also trying to generate more revenue and profit by lower margins.
b. 1. Low profit margin , more sales
2. Lower price leading to more demand and more number of customers flying
3. Ruling out excess competition in the industry by lowering the prices
c. Managerial economics metrics like profit ratio, sales volume, operating profit ,number of customers can be used to define the success of the business model