Differences in Average Prices on the Internet: Evidence from the Online Market for Air Travel

By Chen, Jihui | Economic Inquiry, October 2006 | Go to article overview

Differences in Average Prices on the Internet: Evidence from the Online Market for Air Travel


Chen, Jihui, Economic Inquiry


I. INTRODUCTION

Airlines adopt sophisticated flight-specific pricing strategies, charging dozens of different fares for tickets within the same class (see Borenstein 1989; Borenstein and Rose 1994). While advances in Internet technology have streamlined the information gathering process--making it easier for consumers to identify sites offering the best fares--average ticket prices varied widely in online markets during the late 1990s. For instance, Clemons et al. (2002) examine data from 1997 and observe that the fares for given flights systematically depended on where travelers purchased tickets. They document average price differences as large as 18% for tickets purchased through different online travel agents (OTAs), even after controlling for numerous factors that could affect the fares posted at different OTAs.

Have competition and the evolution of the market for online travel information eliminated average price differentials across competing online sites, or are there any systematic differences in the fares obtained through different online travel sites? This question and my analysis are motivated by three important changes in the online market for air travel that have occurred since the late 1990s. First, between 1997 and 2002, there was an 11-fold increase in the use of OTAs; (1) today, 6 in 10 Americans book air travel on the Internet. (2) Second, since 1997, major airlines entered the online market and now directly compete with OTAs; today, travelers can bypass online travel agents altogether and purchase tickets directly from the carriers. Third, in summer 2001, five major airlines (American, Continental, Delta, Northwest, and United Airlines) established a joint venture, Orbitz, joining the crowd in the online market for air travel. One might expect the combined effects of more savvy shoppers and heightened online competition among competing sites to result in significantly lower fare differentials today than in 1997.

To address these and related issues, I have assembled two data sets consisting of daily ticket price quotes collected from seven travel Web sites in 2002. The Web sites sampled include relatively new sites developed by individual carriers (both major and small airlines), as well as two of the largest OTAs. One data set tracks daily prices for flights with a fixed (future) departure date, and the other tracks daily prices for tickets satisfying a 60-day advance-purchase requirement. Each data set contains fares quoted at OTAs and carrier Web sites for 28 different pairs of flights between Los Angeles (LA) and New York City (NYC). (3) This permits me to examine whether the average price of a specific flight varies, depending on whether it was quoted directly from the carrier's own site or at one of the competing OTAs.

In general, I find that after controlling for ticket availability and other factors that affect ticket prices, there was little systematic difference in the average fares when quotes were available at multiple online sites in 2002. This suggests that the market has evolved considerably since 1997. The parity in average fares observed in the 2002 data may stem in part from the fact that airlines directly compete for online travel dollars today but did not in 1997. Nonetheless, there is evidence that OTAs and carriers charge significantly higher average prices at their sites--ranging from 14.1% to 40.2%--in the absence of competition from other sites for those tickets.

These findings are consistent with a growing literature comparing prices across traditional and online markets. Bailey (1998), Lee (1998), Brynjolfsson and Smith (2000), Scholten and Smith (2002), Clay et al. (2001), and Morton et al. (2001) document that the Internet need not eliminate price differences in online and traditional markets. Pan et al. (2003) as well as Baye et al. (2004) make similar points, but they also note that declining differentials are consistent with an evolutionary story regarding the increased competitiveness of the online marketplace over time. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Differences in Average Prices on the Internet: Evidence from the Online Market for Air Travel
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.