A more realistic description of the demand that airlines face would not specify particular prices at which different types of travelers would choose to fly. Instead, it would distinguish between the groups on the basis of their sensitivity to the price—their price elasticity of demand.

Suppose that a company sells its product to two easily identifiable groups of people—business travelers and students. It just so happens that business travelers are very insensitive to the price: there is a certain amount of the product they just have to have whatever the price, but they cannot be persuaded to buy much more than that no matter how cheap it is. Students, though, are more flexible: offer a good enough price and they will buy quite a lot, but raise the price too high and they will switch to something else. What should the company do?

The answer is the one already suggested by our simplified example: the company should charge business travelers, with their low price elasticity of demand, a higher price than it charges students, with their high price elasticity of demand.

The actual situation of the airlines is very much like this hypothetical example. Business travelers typically place a high priority on being at the right place at the right time and are not very sensitive to the price. But nonbusiness travelers are fairly sensitive to the price: faced with a high price, they might take the bus, drive to another airport to get a lower fare, or skip the trip altogether.

So why doesn’t an airline simply announce different prices for business and nonbusiness customers? First, this would probably be illegal (U.S. law places some limits on the ability of companies to practice open price discrimination). Second, even if it were legal, it would be a hard policy to enforce: business travelers might be willing to wear casual clothing and claim they were visiting family in Ft. Lauderdale in order to save $400.

So what the airlines do—quite successfully—is impose rules that indirectly have the effect of charging business and nonbusiness travelers different fares. Business travelers usually travel during the week and want to be home on the weekend; so the round-trip fare is much higher if you don’t stay over a Saturday night. The requirement of a weekend stay for a cheap ticket effectively separates business from nonbusiness travelers.

Similarly, business travelers often visit several cities in succession rather than make a simple round trip; so round-trip fares are much lower than twice the oneway fare. Many business trips are scheduled on short notice; so fares are much lower if you book far in advance. Fares are also lower if you purchase a last-minute ticket, taking your chances on whether you actually get a seat—business travelers have to make it to that meeting; people visiting their relatives don’t.

Because customers must show their ID at check-in, airlines make sure there are no resales of tickets between the two groups that would undermine their ability to price-discriminate—students can’t buy cheap tickets and resell them to business travelers. Look at the rules that govern ticket-pricing, and you will see an ingenious implementation of profit-maximizing price discrimination.