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Market Segmentation: The Role of Opaque Travel Agencies

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  • Dmitry Shapiro
  • Xianwen Shi

Abstract

"This paper investigates the role of discount travel agencies such as Priceline and Hotwire in the market segmentation of the hotel and airline industries. These agencies conceal important characteristics of the offered services, such as hotel locations or flight schedules. We explicitly model this opaque feature and show that it enables service providers to price discriminate between those customers who are sensitive to service characteristics and those who are not. Service providers can profit from such discrimination despite the fact that the opaque feature virtually erases product differentiation and thus intensifies competition. The reason is that the intensified competition for less sensitive customers enables service providers to commit to a higher price for more sensitive customers, which leads to higher profits overall. This explains why airlines or hotels are willing to lose the advantage of product differentiation and offer services through discount travel agencies." Copyright (c) 2008, The Author(s) Journal Compilation (c) 2008 Wiley Periodicals, Inc..

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 17 (2008)
Issue (Month): 4 (December)
Pages: 803-837

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Handle: RePEc:bla:jemstr:v:17:y:2008:i:4:p:803-837

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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  1. Scott Fay, 2004. "Partial-Repeat-Bidding in the Name-Your-Own-Price Channel," Marketing Science, INFORMS, vol. 23(3), pages 407-418, February.
  2. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  3. Glenn Ellison, 2003. "A Model of Add-on Pricing," NBER Working Papers 9721, National Bureau of Economic Research, Inc.
  4. Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn.
  5. repec:att:wimass:9508 is not listed on IDEAS
  6. Il-Horn Hann & Christian Terwiesch, 2003. "Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel," Management Science, INFORMS, vol. 49(11), pages 1563-1579, November.
  7. Charles A. Holt & David T. Scheffman, 1987. "Facilitating Practices: The Effects of Advance Notice and Best-Price Policies," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 187-197, Summer.
  8. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  9. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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Cited by:
  1. Malgorzata Ogonowska & Dominique Torre, 2010. "Joint Opaque booking systems for online travel agencies," Working Papers hal-00476150, HAL.
  2. Anderson, Chris K. & Xie, Xiaoqing, 2014. "Pricing and market segmentation using opaque selling mechanisms," European Journal of Operational Research, Elsevier, vol. 233(1), pages 263-272.
  3. Jochen Goensch & Claudius Steinhardt, 2013. "Using Dynamic Programming Decomposition for Revenue Management with Opaque Products," BuR - Business Research, German Academic Association for Business Research, vol. 6(1), pages 94-115, May.
  4. Shapiro, Dmitry & Zillante, Arthur, 2009. "Naming your own price mechanisms: Revenue gain or drain?," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 725-737, November.
  5. Malgorzata Ogonowska & Dominique Torre, 2012. "Sustainable Tourism and the emergence of new Environmental Norms," Post-Print halshs-00726127, HAL.

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