Image Pricing: Airline Competition on the Internet

Pricing and positioning are among the most important strategic decisions for every online firm in today’s competitive environment. Traditionally retailers adopt different price formats as store positioning and segmentation strategies by signaling to consumers their specific pricing structures. In particular, “everyday low price” (EDLP) has proved to be a successful strategy for vendors in physical markets in creating a “low price” image and persuading consumers that regardless of what item they buy or when they buy it, they can always expect below average prices. While managing this perception is much easier when it is costly for consumers to compare prices across geographically separated stores, the advent of electronic commerce has significantly reduced search and menu costs, allowing consumers to search multiple stores with a few mouse clicks and competitors to immediately react to any price change at the individual-product level, hence posing serious challenges to sellers adopting EDLP in electronic markets. Using a hierarchical modeling approach and 272,406 unique price observations on airline tickets obtained from seventeen U.S. carriers online, this study examines the role of price format adoption in competition in electronic markets. Specifically, this research aims to address the following questions: 1) Do self-declared EDLP airlines indeed charge stable, low prices online? 2) Is EDLP being adopted in electronic markets in the same fashion as in physical markets? 3) Do they adopt different price formats in different product categories? Our findings offer the first formal evidence of the adoption of a “hybrid” strategy of implementing different price formats in different product categories in electronic markets. Further, online EDLP airlines focus more on the “within-market” characteristics of this pricing strategy rather than the temporal characteristics, implying a diminishing role of intertemporal price consistency to EDLP in online markets. This suggests that reduction in search cost in electronic markets may have differential effects on consumers’ price elasticity along two dimensions: by making price information more accessible, consumers may focus on the comparison of “spot prices” when they perform the search. However, due to the large amounts of information available at the time of search, recall may be poor. As a result, electronic markets may increase consumers’ price sensitivity at any given point in time when they perform price comparison but have a negative effect on consumers’ intertemporal price sensitivity, suggesting that even sellers who pursue an everyday low price strategy online may find temporal price discrimination profitable.

Price formats as a source of price dispersion: A Study of online and ofline pices in the dmestic U.S. arline markets

Alarge body of research in economics, information systems, and marketing has sought to understand sources of price dispersion. Previous empirical work has mainly offered consumer- and/or product-based explanations for this phenomenon. In contrast, our research explores the key role played by vendors' price-format adoption in explaining price dispersion. We empirically analyze over a half-million online and offline prices offered by major U.S. airlines in the top 500 domestic markets. Our study shows that a vendor's price format remains an important source of price dispersion in both channels even after accounting for other factors known to impact dispersion in airline ticket prices. Importantly, this finding is true for both transacted and posted tickets. We document several other interesting empirical findings. First, the lower variance in the prices of "everyday low price" (EDLP) firms serves to reduce the market-level dispersion in prices when such firms are present. Moreover, the price variance of non-EDLP firms in these markets is also lower than in those markets in which EDLP competitors are absent. Second, we also find that dispersion in offered prices increases closer to the departure date, which is consistent with theoretical assertion that price dispersion increases with reservation prices. Finally, we continue to observe dispersion of online prices even after accounting for vendor strategy and other known sources of dispersion, suggesting that the prices are unlikely to converge even in the presence of sophisticated online search mechanisms.preprin

Strategic implementation of 'everyday low price' in electronic markets: a study of airline pricing on the internet

Working papers seriesAn Everyday Low Price (EDLP) strategy is a product-portfolio level pricing strategy by which a firm attempts to convey to consumers that prices across its product portfolio are consistently low. Empirically, the EDLP strategy is operationalized along two dimensions; the “everyday” component, which relates to the consistency in product prices over time, and the “low price” component, which implies that the prices set are on average lower than other prices available in the market. There may, however, be specific categories or markets in which even EDLP firms may prefer to eschew their consistency and low price goals. The U.S. domestic airline industry has two airlines that adopt the EDLP format while most others employ a promotional (HILO) pricing strategy, thus providing a rich context to investigate how the EDLP price-image strategy is implemented. We use a web crawler to gather information on over 270,000 ticket prices offered by the major airlines in 472 markets, and use a hierarchical linear model to analyze how these two dimensions of price vary with ticket categories and market conditions – defined in economics literature by advance purchase periods, weekend restrictions, airlines’ competitiveness, market distance, and hub operations. We find that the EDLP airlines emphasize the everyday dimension of their pricing much more than the low price dimension. Thus while their prices are systematically more consistent than their HILO competitors, their price levels show that they practice the same form of price discrimination with advance-purchase periods as their HILO competitors. Interestingly, while most airlines charge higher prices for tickets without weekend restriction, which are typically targeted towards business travelers, EDLP firms charge lower prices for these tickets. Further investigation at a category level reveals that these lower business fares are distinct features of short-haul markets where EDLP firms are known to enjoy certain cost advantages due to smaller equipment sizes of their flights. From the “everyday” point of view, we see that while there are no differences in the consistency of prices of EDLP tickets based on advance purchase periods, prices of business-focused EDLP tickets are distinctly more consistent than those of leisure-oriented tickets. Curiously, even in markets where EDLP firms are monopolists, they do not appear to be exercising their monopoly power; on the other hand, HILO firms distinctly employ discriminatory pricing in their monopoly markets. Perhaps this is a reflection of EDLP firms pursuing a limit-pricing/barrier-to-entry strategy. Our research shows that the practice of EDLP in online markets involves strategic variations in how price image is communicated.preprin

Why New Car Dealers Sell Used Cars: A Structural Analysis of the Impact of Used Car Markets on the Automobile Distribution Channel

Most new car dealers also sell used cars from the same physical location. Used cars sold by these dealers are relatively good substitutes for new cars and thus, could compete with the new cars sold by the dealers. Previous empirical research on the automobile market has mostly ignored the presence of the used car market while the analytical literature provides ambivalent suggestions. In this paper, we study how the availability of used cars at new car dealers affects the substitution between new and used cars as well as how it affects the margins and profits obtained by the dealer and manufacturer. Using a transaction level dataset which contains both new and used car transactions, we perform a detailed empirical analysis to understand how the existence of the used car markets affect the new car market as well as the channel members. We build a full equilibrium structural model of new and used car competition with profit maximizing manufacturers and dealers. Using the estimated model we quantify the substitutability between new and used cars and compare it with a more conventional demand model which considers new cars only. We then proceed to analyze whether dealers consider the substitutability between new and used cars to shed light on how dealers price their cars. We then contrast the distribution of profits between the manufacturer and dealer to understand how the used markets affect the distribution of power in the channel. Our results indicate that the new car prices have a higher impact on used car demand than used car prices have on new car demand. We also find that the ability to price and sell used cars gives the dealer higher margins on new cars and increases their power in the channel

Obstructive Sleep Apnea – Current Perpectives

Obstructive sleep apnea is a common sleep related breathing disorder. The demand for sleep medicine services has increased exponentially since the recognition of sleep apnea as a disease in the 1960s. The involvement of dentists in the treatment of sleep apnea has increased. It is important that dentists are aware of the problem of sleep disorders and the potential they have to help in their management