Market Segmentation: The Role of Opaque Travel Agencies

Dmitry Shapiro and Xianwen Shi

Working Papers from University of Toronto, Department of Economics

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.

Keywords: market segmentation; opaque travel agency; separation equilibrium; price discrimination (search for similar items in EconPapers)
JEL-codes: D43 D82 L11 M31 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2008-02-05
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt and nep-tur
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Related works:
Journal Article: Market Segmentation: The Role of Opaque Travel Agencies (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:tecipa-310

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