Market Segmentation: The Role of Opaque Travel Agencies

35 Pages Posted: 2 Dec 2008

See all articles by Dmitry Shapiro

Dmitry Shapiro

Department of Economics, Seoul National University

Xianwen Shi

University of Toronto - Department of Economics

Date Written: 2008-06

Abstract

This paper investigates the role of discount travel agencies such as Priceline and Hotwire in the market segmentation of the hotel and airline industries. These agencies conceal important characteristics of the offered services, such as hotel locations or flight schedules. We explicitly model this opaque feature and show that it enables service providers to price discriminate between those customers who are sensitive to service characteristics and those who are not. Service providers can profit from such discrimination despite the fact that the opaque feature virtually erases product differentiation and thus intensifies competition. The reason is that the intensified competition for less sensitive customers enables service providers to commit to a higher price for more sensitive customers, which leads to higher profits overall. This explains why airlines or hotels are willing to lose the advantage of product differentiation and offer services through discount travel agencies.

Suggested Citation

Shapiro, Dmitry and Shi, Xianwen, Market Segmentation: The Role of Opaque Travel Agencies (2008-06). Journal of Economics & Management Strategy, Vol. 17, Issue 4, pp. 803-837, Winter 2008, Available at SSRN: https://ssrn.com/abstract=1306721 or http://dx.doi.org/10.1111/j.1530-9134.2008.00196.x

Dmitry Shapiro

Department of Economics, Seoul National University ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742

Xianwen Shi

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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