One of the Internet’s major influences on our daily lives is in the way that we buy, making shopping much more convenient and bringing greater choice to consumers. But how has online shopping influenced how much we pay? Using data from nearly 1/3 of U.S. domestic airline ticket transactions Anirban Sengupta and Steven N. Wiggins find that buying an airline ticket online is about 12 percent cheaper than buying the same ticket offline

Sengupta, Anirban

Wiggins, Steven N.

LSE Research Online

blo gs.lse.ac.ukhttp://blogs.lse.ac.uk/usappblog/2014/05/16/u-s-domestic-airline-tickets-are-12-percent-cheaper-on-average-when-bought-online/U.S. domestic airline tickets are 12 percent cheaper onaverage when bought onlineOne of the Internet’s major influences on our daily lives is in the way that we buy, makingshopping much more convenient and bringing greater choice to consumers. But how hasonline shopping influenced how much we pay? Using data from nearly 1/3 of U.S. domesticairline ticket transactions Anirban Sengupta and Steven N. Wiggins find that buying anairline ticket online is about 12 percent cheaper than buying the same ticket offline.The sale of  products on the Internet has dramatically risen over the past decade invokingdirect competit ion with tradit ional outlets f or virtually all products. While theoretically theInternet reduces search costs and induces more price competit ion; the empirical resultssupporting these theoretical predictions have been mixed. For example, Brynjolf sson andSmith (2000), and Morton Zettlemeyer, and Silva-Rissio (2001) f ind evidence of  modestlylower prices on the Internet f or books and automobiles respectively; while Lee (1998)f ocused on cars and Bailey (1998) f ocused on books, CDs and sof tware, f ind higher onlineprices.In recent research, we investigated the ef f ects of  internet purchases on airline f ares in the US domesticmarket. Our data include ticket characteristics, restrictions, and f light load f actors, together with dates andchannel of  purchases. Controlling f or t icket and f light characteristics, we f ound that online purchasers payabout twelve percent less than of f line purchasers.  This dif f erence seems rooted in more ef f icientshopping.Internet penetration is substantial in airlines where f or particular city-pairs (routes) the Internet shareexceeds f if ty percent of  transactions.  Unf ortunately, due to a lack of  adequate data, no research apartf rom ours, has estimated the direct ef f ect of  the Internet on airline f ares at the transaction level.Airline PricingAirlines set their f ares by f irst bundling various combinations of  t icket restrictions like ref undability,advance purchase, and travel and stay restrictions.  There are a myriad of  such combinations.  For eachcombination of  characteristics they then set both the f are f or that combination and decide how many seatsto of f er f or sale.  They also adjust the of f erings of  dif f erent f are/restriction combinations during thebooking process.We have data f or t icket characteristics (airline, city-pair, f light and date, t icket restrictions, and f are) thatcover both online and of f line sales f or the largest 150 routes constituting roughly 30 percent of  domesticU.S. t icket transactions in the 4th Quarter of  2004. This is one of  the f irst analyses that usecontemporaneous online and of f line transactions f or the same products in the same market to estimatethe direct ef f ect of  Internet purchases. To the best of  our knowledge the same f ares were available bothonline and of f line in our data.Given the availability of  f ares contemporaneously in both sales channels, we are essentially measuring theef f ects of  shopping intensity. One of  the major benef its of  the Internet f or airline ticket purchases is that itprovides customers’ with the opportunity to buy f or themselves rather than through travel agents.  Hencethe direct ef f ects of  Internet purchase on f ares stem f rom more caref ul shopping by customers as theyselect f or themselves the combination of  t icket characteristics and f ares that best meets their needs.To provide a simple understanding of  the dif f erences between buying airline tickets online and of f lineFigure 1 compares the average online and of f line f ares corresponding to the number of  days in advancethe tickets were purchased on f our dif f erent, large carrier-routes.  Note that the date of  departure is thelef t-hand axis.  In each carrier-route, if  one compares average f ares based on days- in-advance prior todeparture, online customers pay signif icantly less than of f line. All of  these comparisons are at the carrier-route level, so that they control f or simple dif f erences in the provider and the market in which the product issold.Figure 1 – Comparison Between Online and Offline Daily Average FaresFigure 2 slices the data a dif f erent way by comparing average online and of f line f ares f or dif f erent types ofrestrictions on tickets rather than days in advance. The hypothesis of  lower online f ares holds f irm in thisdata dissection as well. Figure 2: Average Online and Offline Fares for different Ticket RestrictionsThe above analyses do not control f or other f actors that may simultaneously af f ect f ares. This can beachieved within a multivariate regression f ramework across all 150 routes. We use an instrumental variableregression to estimate the ef f ect of  t icket characteristics, market structure, sale channel, carrier, and routecharacteristics on f are. In carrying out these regressions we rely on standard f actors the economicsliterature has identif ied as inf luencing airline f ares, such as carrier market share, number of  days inadvance ticket purchased, ref undability, advance purchase requirements, population, and per capita income.Our results show that purchases made on the Internet on average are 12 percent lower than those madethough physical travel agents even af ter all f actors in terms of  route, carrier, f light, and ticketcharacteristics are accounted f or (f or a f ull list please see our paper).Another way to examine online/of f line dif f erences is to look within specif ic departure times within the travelday f or t ickets purchased during comparable intervals prior to departure.  For example, Figure 3 presentsdata on tickets purchased f or travel between New York City’s JFK airport and Los Angeles’s LAX.   Thesetickets are divided into groups f or travel during certain t imes of  the day.  Figure 4 then compares the onlineand of f line f ares that were purchased during comparable intervals prior to departure (e.g. purchase duringsame week as departure, purchase a week bef ore departure, etc.). The dif f erence between online andof f line f ares is comparable to the 12 percent dif f erence based on the regression model.Figure 3: Fare Differential between Online and Offline Transactions by Travel Time-of-Day – JFK,NYC – Los Angeles, CA Figure 4: Fare Differential between Online and Offline Transactions by Number of Days inAdvances Tickets were Purchased, JFK, NYC – Los Angeles, CAUsing comprehensive controls f or market, t icket, carrier, and route characteristics in the largest 150domestic routes in US, our analysis provides robust evidence that customers who purchased ticketspurchased on the Internet on average paid approximately 12 percent less than those purchased ticketsthrough tradit ional travel agents. This f inding is robust when data is analyzed more narrowly at the carrierand route level, during specif ic travel t imes, and f or various purchase windows prior to departure. Our datacontains tickets that were contemporaneously available both online and of f line, so that the lower prices onthe Internet likely stems f rom communication or agency problems between customers and travel agents. While travel agents have access to the same f ares, the process of  communicating the large array ofrestriction combinations and the willingness of  customers to accept particular restrictions is problematic. Regarding agency issues, travel agents do not f ace the same incentives as consumers who spend theirown money on tickets.   It may also be true that a greater percentage of  of f line tickets are reimbursed,resulting in of f line customers using a dif f erent tradeof f  between price and convenience.This article is based on the paper “Airline Pricing, and Ticket Characteristics on and off the Internet.” In theAmerican Economic Journal: Economic Policy.Featured image credit: e_walk (Creative Commons BY NC SA)Please read our comments policy before commenting.              Note:  This article gives the views of the author, and not the position of USApp– American Politics and Policy,nor of the London School of Economics. Shortened URL for this post:  http://bit .ly/1lCMbCb _________________________________About the authors  Anirban Sengupta -  Senior Data ScientistAnirban Sengupta is a Senior Data Scientist at a Fortune 100 company. His research onairline pricing, ef f ects of  Internet on pricing, health outcomes research, and socialnetworking has been published in economic, health, and social welf are journals. _ Steven N. Wiggins – Texas A&M University and Charles River AssociatesSteven N. Wiggins is a Senior Consultant at Charles River Associates. He is an expert inindustrial organization, regulation, and antitrust. He is a prof essor of  economics at TexasA&M University and has served as the George and Mary Jordan prof essor of  economicsand public policy and a university scholar in the Honors Program at Texas A&M. He has beena distinguished lecturer in Germany on American Economic Institutions. Dr. Wiggins isaf f iliated with the f irm’s College Station, Texas, of f ice.CC BY-NC-ND 3.0 2014 LSE USAPP

U.S. domestic airline tickets are 12 percent cheaper on average when bought online

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