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Isolating the Internet Price Effect. Bill Brunger, SVP, Network, Continental Airlines (ret.) and Doctoral Candidate, Case Western Reserve University.

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Presentation on theme: "Isolating the Internet Price Effect. Bill Brunger, SVP, Network, Continental Airlines (ret.) and Doctoral Candidate, Case Western Reserve University."— Presentation transcript:

1 Isolating the Internet Price Effect. Bill Brunger, SVP, Network, Continental Airlines (ret.) and Doctoral Candidate, Case Western Reserve University

2 Motivation: So What Has Happened? (Some level of causality seems obvious)

3 Industry Structure obviously changed… Domestic US Low Cost Carrier growth.

4 Easier to See by Taking Southwest and America West Out… Domestic US Low Cost Carrier growth (No WN,HP). Wave I Wave II Rise of Internet

5 Most customers believe that Airline Pricing Behavior Changed But Im not sure… We still match and go on sale and run off-peak sales and amuse ourselves with our alphabet soup of fares and restrictions… And DCA3 and PFS et al. limited Internet-only and channel-specific activity… There have been relatively few innovations: Priceline/Hotwire, weekly specials, clubs,…

6 The Costs of Distribution Definitely Changed…

7 But other cost changes overwhelmed it…

8 Distribution Became More Concentrated!!!! We Had Expected Fragmentation

9 And, most importantly, Customers Changed Expectations & Behaviors

10 Preliminary Qualitative Study Method –15 open-ended interviews; all referrals; mixed demography and geography, and –All were Experienced travelers All had purchased in the pre-Internet time Limitation: homogeneity of age; all between about 30 and 60. Advantage: Perspective; Most previous studies have been on students (who never used a TA) or clients of a particular firm Data –Analyzed using Glaser and Strauss –Initial set of codes from literature (11): search duration, dynamics, range, timing, fare levels, fit, loyalty, and adjectives and descriptors of control, trust, choice and cooperation; evidence of co-production –Final set (50) cluster into 6 categories Or Google: Brunger Impact Airline

11 Five Findings 1.Switch was not perceived primarily about lower fares; about control & transparency/search breadth. 2.Unexpectedly, the actual search protocols that most respondents perform are quite simple. - Effects of trip type, FFP status & demography? 3.Some formed new levels of involvement with the Search. Some became search enthusiasts. 4.For some, enabled, facilitated, reinforced rich new set of traditional (and web) social interactions. 5. Change with respect to timing, specifically the decision about when to purchase the ticket. & They Believe that They Find Lower Fares

12 Can We See Evidence of the Change? But this is primarily a market segmentation effect…

13 On Average, Internet Agency customers pay 11.5% less

14 What am I going to look at next? Customers who use Internet/OnlineTravel Agencies (OTAs) to purchase leisure trips pay significantly less (11.5% in our sample) for similar itineraries in the same markets than those who purchase through traditional travel agencies even though the fares and inventory offered by the airlines are identical. The purpose of this study is to examine this Internet Price Effect (IPE).

15 Other than Transparency Effects, what could account for 11.5% differential in the IPE? Trip characteristics Customer differences Market structure The Value of the seat Then the question is, controlling for these attributes, does IPE persist?

16 What do I expect to find??? Using My Regression Equation: FP= ß0 + ß1*DC + ß2*TC+ ß3*CD + ß4*MS + ß5*OpV + ε

17 Previous Regression-based Studies of Airlines and Distribution Borenstein, S., and Rose, N. 1994. Competition and Price Dispersion in the U.S. Airline Industry. Journal of Political Economy, 102 (4): 653-682. Clemons, E., Hann, I., and Hitt, L. 2002. Price dispersion and differentiation in online travel: An empirical investigation. Management Science, 48 (4), April: 534-549. Granados, N., Gupta, A., Kauffman, R. 2006. Internet-enabled Market transparency: Impact of price elasticity of demand in the air travel industry. Working paper, Carlson School of Management, University of Minnesota, May 8, 2006. Lane, L. 2003. Price Discrimination in the U.S. Domestic Airline Industry: The Effect of the Internet. Unpublished Third Year Research Project, EDM Program, Weatherhead School of Management, Case Western Reserve University. Sengupta, A., and Wiggins, S. 2006. Airline Pricing, Price Dispersion and Ticket Characteristics On and Off the Internet. Working paper #06- 07, NET Institute, Texas A&M University, November, 2006. Stavins, J. 2001. Price Discrimination in the Airline Market: The Effect of Market Concentration. Review of Economics and Statistics, 83, February: 200-202.

18 Some Very Early Findings… Continentals Top-25 Markets June,2006, every nonstop simple roundtrip Only clearly leisure OTA and Traditional Agencies (No Group size < 9; Coach cabin only CO shipped the same Fares and Inventory to all channels!

19 Preliminary Run: Statistics by Channel

20 Regression Coefficients DV = fare paid as percent of mean; All coefficients significant at.01 level except the red

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