This is to demonstrate the usefulness of the ideas from the last post. When Air Berlin went out of business in 2017 the prices for Lufthansa flights increased substantially (up to 30%). I have this from a news article from the ORF from the 26th of November 2017. Lufthansa, according to this article, claimed that this has nothing to do with them, it is simply a question of an increase of demand and as a consequence that their automated ticket booking system simply more quickly leads to higher price categories. Apparently Lufthansa uses up to 26 price categories (for the same seats). Which category you get depends on when you book your ticket and how full the plane is already and possibly some other things. This is actually a topic for another class – on price discrimination. But let me here only explain in which sense Lufthansa’s statement is right and wrong at the same time, or at the least on how one should perhaps read their statement.
So did the demand for flights go up after Air Berlin went out of business? Look I do not know this fully, but I guess the answer is yes and no. Of course, Lufthansa’s individual demand function has gone up, but this is because the overall supply function has gone down. I would guess that the overall demand function for flights has not changed dramatically. And yes, while Lufthansa may not have changed the automated pricing system, automatically prices have gone up because the automated pricing system does already respond to an individual increase in demand for Lufthansa flights by automatically setting higher prices. I would be prepared to bet a fairly large amount of money that the total amount of money spent on tickets on a Lufthansa flight after Air Berlin went out of business was quite a bit higher than the total amount of money spent on tickets on the same Lufthansa flight before Air Berlin went out of business. I wonder whether Lufthansa could actually have done any better (in terms of profits) by changing the automatic pricing system.