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

Publication Type

Journal Article

Publication Date

2012

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.

Discipline

Computer Sciences | E-Commerce

Research Areas

Information Systems and Management

Publication

Information Systems Research

Volume

23

Issue

1

First Page

164

Last Page

181

ISSN

1047-7047

Identifier

10.1287/isre.1100.0312

Publisher

INFORMS

Additional URL

http://dx.doi.org/10.1287/isre.1100.0312

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