Final answer:
A firm may increase additional service fees for unprofitable customers due to a low lifetime value, meaning the revenue they generate doesn't justify the costs of maintaining the relationship. In competitive industries like airlines, large incumbents may employ predatory pricing to deter newcomers.
Step-by-step explanation:
When a firm begins to charge high fees for additional services to unprofitable customers, it has determined that the lifetime value of those customers is too low to warrant the added efforts to maintain a relationship with them. Firms assess the profitability of customers over the duration of their relationship with the company, and if anticipated revenues do not cover the costs of business, the firm may decide to increase fees or potentially terminate the relationship.
For example, in competitive markets like the airline industry, pricing strategies can deeply impact a company's ability to sustain itself. Incumbent firms may engage in predatory pricing to drive new entrants out of the market and then raise prices once the competition is eliminated. This aggressive tactic can discourage new competitors due to the high risk of entering the market against established firms with significant pricing power.