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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.

Suggested Citation

  • Dmitry Shapiro & Xianwen Shi, 2008. "Market Segmentation: The Role of Opaque Travel Agencies," Working Papers tecipa-310, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-310
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    References listed on IDEAS

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    6. Deneckere, Raymond & Marvel, Howard P & Peck, James, 1997. "Demand Uncertainty and Price Maintenance: Markdowns as Destructive Competition," American Economic Review, American Economic Association, pages 619-641.
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    8. 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, pages 1563-1579.
    9. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
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    Citations

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    Cited by:

    1. Yong Chao & Lin Liu & Dongyuan Zhan, 2016. "Vertical Probabilistic Selling under Competition: the Role of Consumer Anticipated Regret," Working Papers 16-14, NET Institute.
    2. Malgorzata Ogonowska & Dominique Torre, 2012. "Sustainable Tourism and the emergence of new Environmental Norms," Post-Print halshs-00726127, HAL.
    3. 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.
    4. Dmitry Shapiro, 2011. "Profitability of the Name-Your-Own-Price Channel in the Case of Risk-Averse Buyers," Marketing Science, INFORMS, vol. 30(2), pages 290-304, 03-04.
    5. Andrea Runfola & Massimo Rosati & Simone Guercini, 2013. "New business models in online hotel distribution: emerging private sales versus leading IDS," Service Business, Springer;Pan-Pacific Business Association, pages 183-205.
    6. Courty, Pascal & Liu, Wenyu, 2013. "Opaque Selling: Static or Inter-Temporal Price Discrimination?," CEPR Discussion Papers 9463, C.E.P.R. Discussion Papers.
    7. 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.
    8. repec:eee:proeco:v:193:y:2017:i:c:p:590-601 is not listed on IDEAS
    9. Qiang Gong & Qihong Liu & Yi Zhang, 2016. "Optimal product differentiation in a circular model," Journal of Economics, Springer, pages 219-252.
    10. Malgorzata Ogonowska, 2012. "Selling Tourism Products through the Opaque Channels," Post-Print halshs-01219441, HAL.
    11. Malgorzata Ogonowska & Dominique Torre, 2010. "Joint Opaque booking systems for online travel agencies," Working Papers hal-00476150, HAL.
    12. von Wangenheim, Jonas, 2017. "Consumer-Optimal Information Design," Rationality and Competition Discussion Paper Series 53, CRC TRR 190 Rationality and Competition.
    13. Kinshuk Jerath & Serguei Netessine & Senthil K. Veeraraghavan, 2010. "Revenue Management with Strategic Customers: Last-Minute Selling and Opaque Selling," Management Science, INFORMS, pages 430-448.
    14. Robert Zeithammer, 2015. "Optimal selling strategies when buyers name their own prices," Quantitative Marketing and Economics (QME), Springer, vol. 13(2), pages 135-171, June.

    More about this item

    Keywords

    market segmentation; opaque travel agency; separation equilibrium; price discrimination;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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