Abstract

http://ssrn.com/abstract=2044521
 


 



Pricing Strategy and Technology Choices: An Empirical Investigation of 'Everyday Low Price' in the Domestic US Airline Sector


Raymond G. Sin


The University of Hong Kong

Ramnath K. Chellappa


Emory University - Goizueta Business School

Sivaramakrishnan Siddarth


University of Southern California - Marketing Department

December 20, 2011


Abstract:     
There is a rich literature in economics on factors that govern airline prices. With approximately 50% of airline tickets sold online, there is now a renewed interest in investigating airline pricing particularly amongst Information Systems (IS) researchers. While market transparency created by online travel agents (OTAs) is a motivation enough to re-examine airline pricing, one missing piece calls for a thorough empirical investigation: In all extant studies (economics, marketing and IS), pricing by two major airlines, Southwest and JetBlue, has been ignored. Of particular interest to IS researchers is the fact that these two airlines practice a unique form of pricing called Everyday Low Price (EDLP) and have made certain technology-related choices that are distinct and different from previously studied carriers.

We test extant theories of price discrimination in the new online context with both posted and transacted prices, including those of the two EDLP airlines. We find that the EDLP airlines demonstrate distinctly different pricing choices – they are very particular about maintaining price consistency, while except in the case of advance purchase, they forgo other conventional opportunities to price discriminate. They also aggressively undercut competition when equipped with certain cost advantages. Further empirical investigation reveals why EDLP airlines forgo participation in OTAs that potentially offer a larger market. In particular, while promising a larger marketplace, OTAs have the ability to reveal the lowest prices in the market; we find that EDLP prices are lowest in the market only 26% of the time – in other words, consumers have 70% chances of obtaining a better deal from other 'non-low price' airlines for any given ticket. We also show that EDLP prices, though not necessarily being the lowest in the market, do tend towards the lower end of the market spectrum.

Number of Pages in PDF File: 54

Keywords: Information technology, everyday low price (EDLP), airlines, pricing, hierarchical linear model

JEL Classification: O33, C50, L93

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Date posted: April 24, 2012  

Suggested Citation

Sin, Raymond G. and Chellappa, Ramnath K. and Siddarth, Sivaramakrishnan, Pricing Strategy and Technology Choices: An Empirical Investigation of 'Everyday Low Price' in the Domestic US Airline Sector (December 20, 2011). Available at SSRN: http://ssrn.com/abstract=2044521 or http://dx.doi.org/10.2139/ssrn.2044521

Contact Information

Raymond G. Sin (Contact Author)
The University of Hong Kong ( email )
School of Business
HKU
Pok Fu Lam
Hong Kong
Ramnath K. Chellappa
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
(404) 727 7599 (Phone)
(404) 727 2053 (Fax)
HOME PAGE: http://www.bus.emory.edu/ram
Sivaramakrishnan Siddarth
University of Southern California - Marketing Department ( email )
Hoffman Hall 701
Los Angeles, CA 90089-1427
United States
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