Online and Offline Demand and Price Elasticities: Evidence from the Air Travel Industry

Nelson Granados (), Alok Gupta () and Robert J. Kauffman ()
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Nelson Granados: Graziadio School of Business and Management, Pepperdine University, Irvine, California 92612
Alok Gupta: Information and Decision Sciences, Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455
Robert J. Kauffman: W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287

Information Systems Research, 2012, vol. 23, issue 1, 164-181

Abstract: The Internet has brought consumers increased access to information to make purchase decisions. One of the expected consequences is an increase in the price elasticity of demand, or the percent change in demand caused by a percent change in price, because consumers are better able to compare offerings from multiple suppliers. In this paper, we analyze the impact of the Internet on demand, by comparing the demand functions in the Internet and traditional air travel channels. We use a data set that contains information for millions of records of airline ticket sales in both online and offline channels. The results suggest that consumer demand in the Internet channel is more price elastic for both transparent and opaque online travel agencies (OTAs), in part, because of more leisure travelers self-selecting the online channel, relative to business travelers. Yet, after controlling for this channel self-selection effect, we still find differences in price elasticity across channels. We find that the opaque OTAs are more price elastic than the transparent OTAs, which suggests that product information can mitigate the price pressures that arise from Internet-enabled price comparisons. We discuss the broader implications for multichannel pricing strategy and for the transparency-based design of online selling mechanisms.

Keywords: air travel industry; economics of information systems; electronic markets; market transparency; mechanism design; multichannel strategy; price elasticity; online travel agencies; self-selection (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (43)

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