There are simply fewer paying fares per square meter in those classes as a result of the larger seats. So to some extent, the price discrimination reflects both service and opportunity cost. However, the additional cost of serving these passengers is not as great as the differential in the ticket prices.
In addition, there is price discrimination in terms of when the ticket is purchased. Economy class and business class tickets cost more when purchased closer to the flight date. This reflects that buyers purchasing at the last minute are less likely to be price sensitive than buyers purchasing well in advance. Advance purchasers tend to be vacationers, who have a higher price elasticity of demand. Last minute purchasers tend to have low price elasticity of demand, as they need the ticket urgently. The additional cost of serving last minute passengers is unlikely to be significant, if there is any at all. As a result, this change in prices reflects price discrimination.
There is no opportunity for arbitrage in this system. Airline security is tight, and as a result there is no secondary market for airplane tickets. Tickets are non-transferable, and a third party would be barred from boarding the flight. The formal arbitrage market lies with ticket consolidators such as Expedia and Travelocity that purchase blocks of tickets early on discount, then resell them later to consumers.
The impact of the monopoly means that Cathay Pacific has a strong flexibility to use prices as a means of maximizing profit by maximizing revenues. Consumers who are more price sensitive can purchase early for a discount, and that discount is expected to be roughly equivalent of purchasing a less convenient flight (with a change) on a competing airline. For last minute purchasers, no discount is needed because the alternatives are relatively unpalatable to most consumers in a hurry to get to Hong Kong.
Works Cited:
McAfee, R. (2008). Price discrimination. Issues of Competition Law and Policy. Retrieved November 16, 2010 from http://www.mcafee.cc/Papers/PDF/ABAPriceDiscrimination.pdf
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