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Read “American Airlines,” located in Chapter 24 of the textbook, Managerial Economics: A Problem Solving Approach. American Airlines announced a new pricing strategy that they believed would address concerns and benefit the company.

Read “American Airlines,” located in Chapter 24 of the textbook, Managerial Economics: A Problem Solving Approach. American Airlines announced a new pricing strategy that they believed would address concerns and benefit the company. Conduct further research on American Airlines’ value pricing. Analyze American Airline’s structure and decision to implement value pricing and discuss the following (750-1,000 words):

  1. Discuss the decision behind American Airlines developing and implementing value pricing to gain more market shares.
  2. Evaluate the impact competitors and additional economic factors had on the results of the value pricing strategy. What factors contributed to the advantages and disadvantages of this new pricing strategy.
  3. Provide alternative recommendations to the value pricing strategy that would result in a different outcome when implementing the strategy.

Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is not required.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

American Airlines

In1992, American Airlines (AA), the market share leader in the airline industry, announced a new pricing strategy—Value Pricing. AA believed Value Pricing would address 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 off our classes (first class, coach, discounted 7 and 21 day purchase) and began pricing based on flight length. These 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 sys-tem set firm prices based on restrictions and miles flown and eliminated any corporate discount programs. Most importantly, American believed the new fare structure created through Value Pricing would increase volume on the airplanes (raising load factors). AA believed Value Pricing would drive an increase in overall demand through its effort to stimulate travel and economic activity. American also believed these prices would allow AA to increase its market share.

Question: Is this pricing program likely to be successful?

Answer: AA failed to anticipate its competitors’ reactions to this new pricing plan. Had Robert Crandall, the CEO of AA at the time, understood the lessons of game theory; a devastating industry price war might have been avoided. Instead, AA pushed forward with the plan, competitors responded aggressively, and industry profits plummeted. The Value Pricing initiative was abandoned within months of its launch. Instead, Crandall should have tried a strategy that was less easily mimicked by his rivals.

Reference

Froeb, L.M., McCann, B.T., Shor, M., & Ward, M.R. (2014). Managerial economics: A problem solving approach, (4th ed.). Boston, MA: Cengage Learning

RUBRIC

Case Study: American Airlines

  1
Unsatisfactory
0.00%
2
Less than Satisfactory
74.00%
3
Satisfactory
79.00%
4
Good
87.00%
5
Excellent
100.00%
70.0 %Content  
25.0 % Discuss Implementing Value Pricing A discussion on American Airlines implementing value pricing to gain market share is not included. A discussion on American Airlines implementing value pricing to gain market share is present, but it lacks detail or is incomplete. A discussion on American Airlines implementing value pricing to gain market share is present. A discussion on American Airlines implementing value pricing to gain market share is present. There is a detailed decision for developing and implementing this pricing strategy. A discussion on American Airlines implementing value pricing to gain market share is clear. There is a detailed decision for developing and implementing this pricing strategy with a justification for gaining market share with the pricing implementation.
25.0 % Evaluate Impact on Value Pricing Implementation A discussion of the impact external factors had on the results of the value pricing strategy is not included. A discussion on the impact external factors had on the results of the value pricing strategy is included, but it lacks detail or is incomplete. A discussion on the impact external factors had in the results of the value pricing strategy is included. There is some mention of the advantages and disadvantages contributing to the pricing strategy. A detailed discussion on the impact external factors had in the results of the value pricing strategy is included. There is a description of the advantages and disadvantages contributing to the pricing strategy. A comprehensive discussion on the impact external factors had in the results of the value pricing strategy is included. There is a clear description of the advantages and disadvantages contributing to the pricing strategy.
20.0 % Provide Alternative Recommendations to Value Pricing An alternative recommendation to the value pricing strategy is not included. An alternative recommendation to the value pricing strategy is included, but it lacks detail or is incomplete. An alternative recommendation to the value pricing strategy is included. There is some mention of the possible outcome when implementing the alternative recommendation. An alternative recommendation to the value pricing strategy is included. The recommendation is detailed and aligned with the American Airlines vision. There is mention of the possible outcome when implementing the alternative recommendation and an explanation for the proposed strategy. More than one alternative recommendations to the value pricing strategy are included. The recommendations are detailed and aligned with American Airlines vision. There is a detailed description of the possible outcome when implementing the alternative recommendation and an explanation for the proposed strategy.
20.0 %Organization and Effectiveness  
7.0 % Thesis Development and Purpose Paper lacks any discernible overall purpose or organizing claim. Thesis is insufficiently developed or vague. Purpose is not clear. Thesis is apparent and appropriate to purpose. Thesis is clear and forecasts the development of the paper. Thesis is descriptive and reflective of the arguments and appropriate to the purpose. Thesis is comprehensive and contains the essence of the paper. Thesis statement makes the purpose of the paper clear.
8.0 % Argument Logic and Construction Statement of purpose is not justified by the conclusion. The conclusion does not support the claim made. Argument is incoherent and uses noncredible sources. Sufficient justification of claims is lacking. Argument lacks consistent unity. There are obvious flaws in the logic. Some sources have questionable credibility. Argument is orderly, but may have a few inconsistencies. The argument presents minimal justification of claims. Argument logically, but not thoroughly, supports the purpose. Sources used are credible. Introduction and conclusion bracket the thesis. Argument shows logical progressions. Techniques of argumentation are evident. There is a smooth progression of claims from introduction to conclusion. Most sources are authoritative. Clear and convincing argument that presents a persuasive claim in a distinctive and compelling manner. All sources are authoritative.
5.0 % Mechanics of Writing (includes spelling, punctuation, grammar, language use) Surface errors are pervasive enough that they impede communication of meaning. Inappropriate word choice or sentence construction is used. Frequent and repetitive mechanical errors distract the reader. Inconsistencies in language choice (register) or word choice are present. Sentence structure is correct but not varied. Some mechanical errors or typos are present, but they are not overly distracting to the reader. Correct and varied sentence structure and audience-appropriate language are employed. Prose is largely free of mechanical errors, although a few may be present. The writer uses a variety of effective sentence structures and figures of speech. Writer is clearly in command of standard, written, academic English.
10.0 %Format  
5.0 % Paper Format (use of appropriate style for the major and assignment) Template is not used appropriately or documentation format is rarely followed correctly. Appropriate template is used, but some elements are missing or mistaken. A lack of control with formatting is apparent. Appropriate template is used. Formatting is correct, although some minor errors may be present. Appropriate template is fully used. There are virtually no errors in formatting style. All format elements are correct.
5.0 % Documentation of Sources (citations, footnotes, references, bibliography, etc., as appropriate to assignment and style) Sources are not documented. Documentation of sources is inconsistent or incorrect, as appropriate to assignment and style, with numerous formatting errors. Sources are documented, as appropriate to assignment and style, although some formatting errors may be present. Sources are documented, as appropriate to assignment and style, and format is mostly correct. Sources are completely and correctly documented, as appropriate to assignment and style, and format is free of error.
100 % Total Weightage  

 

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