Strategic Implementation of 'Everyday Low Price' in Electronic Markets: A Study of Airline Pricing on the Internet

47 Pages Posted: 31 May 2007 Last revised: 27 Jul 2014

See all articles by Raymond G. Sin

Raymond G. Sin

The University of Hong Kong

Ramnath K Chellappa

Emory University - Goizueta Business School

Sivaramakrishnan Siddarth

University of Southern California - Marketing Department

Date Written: July 27, 2009

Abstract

An Everyday Low Price (EDLP) strategy is a product-portfolio level pricing strategy by which a firm attempts to convey to consumers that prices across its product portfolio are consistently low. Empirically, the EDLP strategy is operationalized along two dimensions; the “everyday” component, which relates to the consistency in product prices over time, and the “low price” component, which implies that the prices set are on average lower than other prices available in the market. There may, however, be specific categories or markets in which even EDLP firms may prefer to eschew their consistency and low price goals. The U.S. domestic airline industry has two airlines that adopt the EDLP format while most others employ a promotional (HILO) pricing strategy, thus providing a rich context to investigate how the EDLP price-image strategy is implemented. We use a web crawler to gather information on over 270,000 ticket prices offered by the major airlines in 472 markets, and use a hierarchical linear model to analyze how these two dimensions of price vary with ticket categories and market conditions – defined in economics literature by advance purchase periods, weekend restrictions, airlines’ competitiveness, market distance, and hub operations.

We find that the EDLP airlines emphasize the everyday dimension of their pricing much more than the low price dimension. Thus while their prices are systematically more consistent than their HILO competitors, their price levels show that they practice the same form of price discrimination with advance-purchase periods as their HILO competitors. Interestingly, while most airlines charge higher prices for tickets without weekend restriction, which are typically targeted towards business travelers, EDLP firms charge lower prices for these tickets. Further investigation at a category level reveals that these lower business fares are distinct features of short-haul markets where EDLP firms are known to enjoy certain cost advantages due to smaller equipment sizes of their flights. From the “everyday” point of view, we see that while there are no differences in the consistency of prices of EDLP tickets based on advance purchase periods, prices of business-focused EDLP tickets are distinctly more consistent than those of leisure-oriented tickets. Curiously, even in markets where EDLP firms are monopolists, they do not appear to be exercising their monopoly power; on the other hand, HILO firms distinctly employ discriminatory pricing in their monopoly markets. Perhaps this is a reflection of EDLP firms pursuing a limit-pricing/barrier-to-entry strategy. Our research shows that the practice of EDLP in online markets involves strategic variations in how price image is communicated.

Keywords: Everyday low price (EDLP), competition, airline industry, Internet, hierarchical linear model

JEL Classification: M3, C4, L1, L9

Suggested Citation

Sin, Raymond G. and Chellappa, Ramnath K. and Siddarth, Sivaramakrishnan, Strategic Implementation of 'Everyday Low Price' in Electronic Markets: A Study of Airline Pricing on the Internet (July 27, 2009). Available at SSRN: https://ssrn.com/abstract=989849 or http://dx.doi.org/10.2139/ssrn.989849

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://nimbusprof.com/

Sivaramakrishnan Siddarth

University of Southern California - Marketing Department ( email )

Hoffman Hall 701
Los Angeles, CA 90089-1427
United States

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