Value of a Platform to a Seller: Case of American Airlines and Online Travel Agencies
32 Pages Posted: 7 Oct 2013
Date Written: September 30, 2013
We approach the issue of the value of a platform to a seller in a two-sided market where both buyers and sellers multi-home. A seller that loses access to a major buyer platform can potentially incur substantial financial losses. We exploit a recent conflict between American Airlines and two leading online travel agencies (Expedia and Orbitz), which dropped American Airlines fare quotes during the first quarter of 2011. We present a simple model of airline ticket distribution. This model provides a framework to analyze the events that happened in the American Airlines – online travel agency conflict. We analyze price data for the first quarter of 2010 and 2011, employing a simple difference-in-differences identification strategy to evaluate changes in American Airlines’ fares. After controlling for across-market heterogeneity, carrier-specific time-invariant effects, and time-specific carrier-invariant effects, American Airlines’ fares during the conflict were 2.7-4.2 percent lower than similar fares charged by American’s main competitors (United, Continental, Delta, and US Airways). The fare effect is most pronounced in the sub-sample of one-stop itineraries, where competition is stronger, and customers are more likely to have to rely on travel agents – rather than carriers’ own web-sites – for flight bookings. In sum, our findings indicate that access to major buyer platforms is considerably valuable to a seller. We estimate that during the first quarter of 2011 the loss of access to the Expedia/Orbitz platforms resulted in over $50 million reduction in revenue for American Airlines.
Keywords: two-sided markets, value of platforms, online travel agents
JEL Classification: D4, L4, L93
Suggested Citation: Suggested Citation