Price Discrimination and the Cruise Line Industry: Implications for Market Definition, Competition, and Consumer Welfare

Abstract

This article extends the price discrimination literature and applies it to market definition and competitive effects analysis in recent mergers in the cruise line industry. In that industry, short run output is fixed. If firms want to increase price and restrict output to price‐insensitive customers, they have to increase the output and lower price to the price‐sensitive customers. We show that with fixed output (1) it is in firms’ interest to engage in price discrimination, (2) firms have increased ability to engage profitably in price discrimination as the intensity of competition decreases, and (3) the average price of price‐sensitive and ‐insensitive consumers increase with reduced competition. Unlike the economists at the Federal Trade Commission, our analysis suggests that cruise lines engage in third‐degree price discrimination. Moreover, the cruise industry could be a separate market and a reduction in the number of competitors might raise average prices.Price Discrimination, Fixed Output, Oligopolistic Competition, Antitrust, Merger, Cruise Industry, D4, L4, L8,

Marketing research and revenue optimization for the cruise industry: A concise review

“…In addition to marketing research and revenue management, economic issues of price discrimination, competition, merging and consumer welfare on the cruise industry are discussed in Langenfeld and Li (2008). In this article, the authors explore effects of the intensity of competition on firms' price discrimination strategies and the average prices paid by price-sensitive and -insensitive customers in the cruise market.…”

Cruise tourism: a hedonic pricing approach

“…Ji and Mazzarella (2007) analyse the application of modified nested and dynamic class allocations for cruise line companies and propose a model for cruise line revenue management. Langenfeld and Li (2008) develop a broad model based on price discrimination, highlighting the importance of price discrimination, mainly third-degree as a result of market segmentation, unlike the results of Coleman et al (2003). Moreover, these authors point out that, in the cruise industry, price discrimination can be based on certain customer characteristicsi.e.…”

“…However, it is difficult to get other information from companies because of the confidentiality required, and very few publications did (Coleman et al, 2003;Langenfeld and Li, 2008;Sun, Gauri and Webster, 2011).…”

The Effect of Price Dispersion on hOtel Performance

“…Price discrimination, as one of the prevailing strategies in marketing management, offers different prices to different segments of consumers who share particular attributes and characteristics (Narasimhan, 1984;Barron et al, 2004;Syverson, 2007;Gerardi and Shapiro, 2009), resulting in price dispersion, which is often defined as the spread between the highest and lowest prices (Baye et al, 2004). Price discrimination has been proven to be a successful strategy with the emergence of numerous online channels in a number of service industries, such as airlines (Giaume and Guillou, 2004;Brunger, 2009;Gerardi and Shapiro, 2009), cruise lines (Petrick, 2005;Langenfeld and Li, 2008), hotels (Law et al, 2007;Pan, 2007) and rental cars (Kimes and Chase, 1998). As a critical means of reflecting all the characteristics of different customer market segments with various needs and even different price elasticities (Kimes and Wirtz, 2003), a firm's price discrimination strategy has a direct impact on its competitiveness in the market and, thus, sales revenue and market share.…”