Source:
Management Science, Volume 48, Issue 4, p.534-550 (2002)
Keywords:
Electronic Markets;
Price Dispersion;
Product Differentiation
Abstract:
Previous research has examined whether price dispersion exists in theoretically highly
efficient Internet markets. However, much of the previous work has been focused on
industries with low cost and undifferentiated products. In this paper, we examine the presence
of price dispersion and product differentiation using data on the airline ticket offerings
of online travel agents (OTAs). We find that different OTAs offer tickets with substantially
different prices and characteristics when given the same customer request. Some of this
variation appears to be due to product differentiation—different OTAs specialize by systematically
offering different trade-offs between ticket price and ticket quality (minimizing the
number of connections, matching requested departure and return time). However, even after
accounting for differences in ticket quality, ticket prices vary by as much as 18% across OTAs.
In addition, OTAs return tickets that are strictly inferior to the ticket offered by another OTA
for the same request between 2.2% and 28% of the time. Overall, this suggests the presence
of both price dispersion and product differentiation in the online travel market.