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
University of Southern California - Marketing Department
December 20, 2011
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
Date posted: April 24, 2012