Document Type
Article
Publication Date
4-1-2008
Abstract
Customers who use Internet-based online travel agencies (OTAs) to purchase “Clearly Leisure” trips (defined as trips that were booked at least 14-days in advance, where the customer stayed over the weekend) pay significantly less (more than 10 percent less in our sample) for similar itineraries in the same markets than those who purchase through traditional travel agencies. This difference persists even though the fares and inventory offered by the airline through each channel are identical because of contractual arrangements and airline marketing strategies. The purpose of this study is to examine this Internet Price Effect (IPE). Specifically, this study uses detailed passenger-level trip data (previously unreported in the literature) from a database maintained by Continental Airlines to examine differences in fares paid across ticket distribution channels, focusing on OTAs compared to traditional travel agencies, in order to attempt to quantify the incremental impact of Internet search on the fares customers pay. The study is operationalized as a multivariate regression in which the dependent variable is the Fare Paid (transformed to its natural log). The independent variable of interest is the distribution channel through which the ticket was purchased. The study controls for trip characteristics (advance purchase, length of stay and group size), customer differences (frequent flyer status and trip origin in an airline hub) and market-effect dummy variables. The study introduces several explanatory variables new to the literature, including the Bid Price (or opportunity cost) of the seat, which explains as much as a third of the variation in Fare Paid. Control variables take into account precedents from previous studies in the literature. The study finds that, after controlling for this set of variables, the IPE persists at a negative five to eight percent level across a wide range of timeframes and market sizes. By reformulating the dependent variable to reflect surplus revenue contribution, the study further demonstrates that, even though OTA customers pay less for their seats, they are almost as profitable as customers who use traditional travel agencies, and in some time frames, are more profitable.
Keywords
airlines, airline pricing, revenue management, Internet Price Effect (IPE), traditional travel agencies, Online Travel Agencies (OTAs), internet purchase, search efficiency, price transparency, Surplus Revenue Contribution (SRC)
Rights
© The Author(s). Kelvin Smith Library provides access for non-commercial, personal, or research use only. All other use, including but not limited to commercial or scholarly reproductions, redistribution, publication or transmission, whether by electronic means or otherwise, without prior written permission is strictly prohibited.
Department/Center
Design & Innovation
Recommended Citation
Brunger, William G., "The Impact of the Internet on Airline Fares: Part II: Understanding the "Internet Price Effect"" (2008). Student Scholarship. 458.
https://commons.case.edu/studentworks/458