Online and offline demand and price elasticities

Evidence from the air travel industry

Nelson Granados, Alok Gupta, Robert J. Kauffman

Research output: Contribution to journalArticle

63 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)164-181
Number of pages18
JournalInformation Systems Research
Volume23
Issue number1
DOIs
StatePublished - Jan 1 2012

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demand elasticity
price elasticity
Elasticity
travel agency
travel
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industry
demand
Air
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Industry
Sales
consumer price
selling
Transparency
supplier
transparency
sales
purchase

Keywords

  • Air travel industry
  • Economics of information systems
  • Electronic markets
  • Market transparency
  • Mechanism design
  • Multichannel strategy
  • Online travel agencies
  • Price elasticity
  • Self-selection

Cite this

Online and offline demand and price elasticities : Evidence from the air travel industry. / Granados, Nelson; Gupta, Alok; Kauffman, Robert J.

In: Information Systems Research, Vol. 23, No. 1, 01.01.2012, p. 164-181.

Research output: Contribution to journalArticle

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