Demand and price are related; raising prices typically lowers demand. Many companies understand that if they can segment their market and offer different prices to different segments, they can often capture more revenue. Aaron’s Air is a small commuter airline.
They typically charge $150 for a one-way flight between a resort island they serve and the mainland. In times of low, medium, and high demand, Aaron (the owner and pilot) estimates that he’ll sell 100, 200, or 500 seats per week, respectively. He is considering offering two different fares based on whether his customers stay over a Saturday night on the island. He thinks that business travelers coming to the island for conferences and retreats would typically not stay, but vacationers would. He expects that the low fare will attract additional customers. However, he anticipates that some of his regular customers will also pay less. The two fares would be $90 and $210. Aaron estimates that in times of low demand he’d sell 30 high-fare and 80 low-fare tickets—revenue of 30 * +210 + 80 * + 90 = +13,500. In times of medium demand, he estimates 110 high-fare and 250 low-fare tickets, for an estimated revenue of $45,600. And in times of high demand, he expects 500 low-fare customers and 250 high-fare customers, yielding $97,500.
Make a payoff table and decision tree for this decision.