WWW.ABSTRACT.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Abstract, dissertation, book
 
<< HOME
CONTACTS



Pages:   || 2 | 3 | 4 |

«ORBITZ, ONLINE TRAVEL AGENTS AND MARKET STRUCTURE CHANGES IN THE PRESENCE OF TECHNOLOGY-DRIVEN MARKET TRANSPARENCY Nelson Granados (contact author) ...»

-- [ Page 1 ] --

ORBITZ, ONLINE TRAVEL AGENTS AND MARKET STRUCTURE CHANGES

IN THE PRESENCE OF TECHNOLOGY-DRIVEN MARKET TRANSPARENCY

Nelson Granados (contact author)

Doctoral Program

ngranados@csom.umn.edu

Alok Gupta

Associate Professor

agupta@csom.umn.edu

Robert J. Kauffman

Professor and Co-Director, MISRC

rkauffman@csom.umn.edu

Information and Decision Sciences

Carlson School of Management

University of Minnesota Minneapolis, MN 55455 Last revised: July 9, 2003 ____________________________________________________________________________________

ABSTRACT

Air travel distribution has been transformed by Internet technology because of an increase in market transparency, the level of availability and accessibility of product and price information. This article attempts to explain and interpret changes in the market for online travel with the market entry of air carrier consortium-owned Orbitz, a second generation online travel agency (OTA) that significantly changed the competitive dynamics around market transparency. Our interpretation of the developments is based on market microstructure theory, and more recent work that relates market transparency to firm pricing strategies and consumer demand. Our interpretation is developed in three stages. First, we explore market transparency-related developments in first generation online travel since the mid-1990s in the United States. Second, we analyze Orbitz’s market transparency strategy and its impacts on the industry, leading to the emergence of new consumer expectations in the Internet channel. Third, we assess other related changes in the industry that have emerged that further suggest the broad impacts of Orbitz’s strategy, including recent changes in the highly pricesensitive leisure travel segment of the OTA market. Overall, our findings suggest that market transparency changes will continue to drive additional changes in the OTA sector.

KEYWORDS: Airline industry, asymmetric information, consumer demand, industry structure, market microstructure, market transparency, online booking, online travel agencies, Orbitz, travel industry.

_________________________________________________________________________________

INTRODUCTION

The Internet has become an important information source for end consumers in many industries.

It has brought higher levels of market transparency, permitting consumers to observe information that previously was not available via other distribution channels. As long ago as 1998, referring to Internet sales of airline tickets, Delta Airline’s CEO, Leo Mullin, stated that “there is almost perfect information out there” (Leonhart, 1998).

We define market transparency as the level of availability and accessibility of information about the trading process and the product being traded, including product characteristics and prices. A good example can be observed in the travel industry, where the influence of information provided by online travel agencies (OTAs) has been significant. According to the Travel Industry Association of America (2002), two-thirds of the 96 million people who traveled and used the Internet in 2002 planned and researched travel options online. This led to new revenue dollars for online purchases, and shifted the mix away from offline purchases. Nielsen NetRatings (2001) reported that online travel sales approached US$ 1.2 billion in the United States market in January 2001, representing nearly a third of all e-commerce transactions. In addition, visits to online travel sites stimulated another $681 million in revenue related to purchases by phone, fax, or in person.

Recently, use of the Internet for consumer search and purchase of airline tickets has become common in the United States market. Meanwhile, some OTAs, such as Expedia (www.expedia.com), Travelocity (www. travelocity.com), and Priceline (www.priceline.com), have consolidated their market positions in the online travel industry, following their market entry in the late 1990s.

However, the OTA industry was suddenly shaken up by Orbitz (www.orbitz.com), a new OTA that was launched in mid-2001, with the backing of five large airline firms: American, Continental, Delta, Northwest, and United (Zellner, 2001). Within one year of the start of its operations, Orbitz had captured about 24% of the OTA market in the United States (Mead, 2002). Some industry participants lobbied policymakers to prevent Orbitz from operating, since many observers had suspicions that the firm would operate as an oligopoly, changing the competitive structure of air travel distribution over time (Procomp, 2003).

How has Internet technology transformed the dynamics of air travel distribution in less than a decade? How did Orbitz, a second generation OTA market entrant, influence the industry with the strength of a major competitor in less than a year after its launch? What other impacts were felt within the OTA market following the entry of Orbitz? We explore these questions from the theoretical perspective of market transparency, and comparisons of Orbitz’s OTA offerings with those of other firms. We contend that Orbitz led a new wave of market transparency designs in the OTA marketplace, resulting in a changed basis for com-petition. We argue that market transparency influences the potential size of a market and the price elasticity of demand, which explains the rapid growth of online travel sales. We also discuss the findings of our analysis in specific competitive scenarios, including the discount OTA travel market, where a new player called Hotwire (www.hotwire.com) has also emerged, once again with a new market transparency strategy that has been an attraction for customers (Hotwire, 2002).





THEORETICAL BACKGROUND

Market transparency is composed of four elements: price transparency, product transparency, supplier transparency, and availability transparency (Morgan Stanley Dean Witter, 2000). Price transparency exists when information about the trading process is made available, such as in dynamic markets that capture the demand and supply forces. For example, auction markets capture a seller’s valuation through the reservation price, while potential buyers’ valuations are captured through the competitive bid process. Product transparency is based on information about the characteristics of the product. Availability transparency refers to the extent to which inventory information is available on the seller’s side. Supplier transparency refers to the identity of the supplier. Each of these provides opportunities in business-to-consumer (B2C) e-commerce settings for the seller to establish different competitive strategies to approach the marketplace.

Financial Market Microstructure Design Theory A common concern among financial market design theorists is how market transparency influences market liquidity. Liquidity is the ability to rapidly trade out of a position at prices that reflect market supply and demand with reasonable trading costs, and the relative certainty that the transaction will clear and settle. In general, the larger the number of buyers and sellers in a market, the higher will be the probability that matching will occur, supporting trade and exchange (Spulber, 1999).

In the B2C e-commerce context in which airline reservations are made by consumers, liquidity is driven by two forces. First is the ability of airlines to sell the “product,” an inventory of empty seats, at a profit. Second is the ability of consumers to find the product that best fits their needs. In air travel, consumers need to find the right combination of itinerary and service at a reasonable price.

Market transparency can have an influence on both these drivers of liquidity. For example, an unbiased OTA may attract airlines to the extent that they believe their prices are displayed correctly and with equal priority as those of other airlines. Also, an unbiased OTA attracts consumers if it brings to market the best prices and products in the selection process, regardless of the service provider. In our analysis, we focus on the ways market transparency can attract consumers, but recognize that such transparency also generates more broad-based liquidity in the market to the extent that it attracts suppliers.

Market transparency can play a major role in industrial organization. Due to existing information asymmetries, some market participants may be able to appropriate value from a transaction due to an informational advantage that they hold. To the extent that market transparency transforms the nature and extent of these asymmetries, both the market dynamics (e.g., price competition levels and discounting strategies) and industry structure (e.g., new entrants that disintermediate established players) may change. For example, Clemons and Weber (1990) studied the "Big Bang" at the London Stock Exchange, where floor trading was replaced by screen-based trading. This transformation changed the level of market transparency, and increased market liquidity and turnover, but reduced margins for the equity market-maker intermediaries. This led to large-scale transfers of wealth between the financial sector and the public.

Demand, Strategic Pricing and Market Transparency We propose a new theoretical perspective on the potential impact of market transparency on consumer demand. Our conceptualization suggests that market transparency may increase liquidity by attracting consumers and hence increasing the potential market size. We believe that market transparency may result in lower consumer search costs for product information, which, in turn, may result in a more accurate evaluation of the alternatives or an increase in the number of alternatives to be considered. This also will tend to increase consumer surplus and result in a lower elasticity of consumer demand. This theoretical perspective is consistent with other research on consumer behavior, which suggests that if consumers do not receive expected information about the product, they may view it with suspicion (e.g., Johnson and Levin, 1985). We hypothesize that if the change in market transparency is large enough, it may attract new consumers, thereby increasing the base demand, and it may influence the sensitivity of existing consumers to price changes. Finally, we also conjecture that when price dispersion exists, an increase in price transparency will tend to make consumers aware of lower prices in the market, increasing the pressures for a decrease in price. For additional details on the development of the related theory, the interested reader should see the theory paper by Granados, Gupta and Kauffman (2003).

If one of the effects of a move to market transparency is a change in market demand, then managers may need to adopt different pricing strategies to maximize the value of their business operations in the new competitive environment. For example, if we focus only on product transparency, it seems that a market mechanism that supports the revelation of more information about the product to the consumer will result in a higher level of willingness-to-pay by consumers.

Consider a perspective that is consistent with what Akerlof (1970) theorized in his classic “Market for Lemons” article: that a diminution in information asymmetry between buyers and sellers in product markets will help to “shore up” the fundamentals for a sound market. To the extent that different forms of market transparency—price, product, availability and supplier—are considered as design variables for the firm in its selling activities, there is a potential for beneficial impacts relative to competitors, who may handle the design opportunity differently. On the other hand, higher price transparency also may have countervailing effects: a positive one due to lower demand elasticity and a negative one due to lower search costs that makes cheaper options available.

Other aspects of the environment that are present in Internet-based selling also deserve some comment. For example, the more digital are the product characteristics and the more dynamic the market mechanism, the greater will be the potential for transparency. For example, an informationbased product sold in an electronic auction market is more likely to be presented to the market in a transparent way compared to a durable good that is sold under a traditional posted-price mechanism.

Also, in the airline industry, the emergence of the OTAs has enabled consumer access to information about prices and products that was never available through traditional travel agencies. As a result, given the nearly exclusively information-based characteristics of airline tickets, we expect the effects of increased market transparency due to the Internet to be significant in this industry.

AIRLINE INDUSTRY AND OTA SERVICES

In this section we follow the developments that led to the current competitive scenario in the U.S.

online air travel industry. First, we review the airline industry prior to the advent of OTAs. Second, we present the history of OTAs, with special focus on Orbitz. Orbitz is an airline-owned OTA that has brought new competitive dynamics and fast penetration based on state-of-the-art technology and a novel business concept.

Deregulation, CRSs and Re-Regulation Prior to 1978, the government exerted control over fares and airline routes. In 1978, the airline industry was deregulated and airline firms have since been able to set fares and schedules based on competitive and demand forces (Global Aviation Associates, 2001). According to Copeland and McKenney (1988), to deal with this new competition, the airlines introduced three strategies. First was the implementation of pricing strategies to increase revenues, which commonly lead to fare wars.

The second strategy was the development of computer reservation systems (CRSs) to automate the distribution of airline tickets. CRSs were installed at travel agency locations, accompanied by longterm contractual sales agreements (Duliba, Kauffman and Lucas, 2001). This provided incentives for airlines to be the first-movers in installing CRS terminals at the agencies, which would lock them in and create a “halo effect” for market share that favored the airline firm owners of the CRSs (Copeland and McKenney, 1988).



Pages:   || 2 | 3 | 4 |


Similar works:

«Chapter 2 Functional Anatomy of Muscle: Muscle, Nociceptors and Afferent Fibers S. Mense Contents 2.1 Structure and Basic Function of Skeletal Muscle........................................ 18 2.2 Morphology of Muscle Nociceptors..................................................... 25 2.2.1 Structure of Muscle Nociceptors in the Light and Electron Microscope......... 25 2.2.2 Receptor Molecules...»

«NAIST-IS-DD0761015 Doctoral Dissertation Graph-Theoretic Approaches to Minimally-Supervised Natural Language Learning Mamoru Komachi March 17, 2010 Department of Information Processing Graduate School of Information Science Nara Institute of Science and Technology A Doctoral Dissertation submitted to Graduate School of Information Science, Nara Institute of Science and Technology in partial fulfillment of the requirements for the degree of Doctor of ENGINEERING Mamoru Komachi Thesis Committee:...»

«THE REAL COST OF COLLEGE Time & Credits to Degree at California Community Colleges TO DO: $$ FEES $$ BOOKS FSA ill out FA $$$ SUBTOTAL f pay fees EXCESS UNITS $$$$ $$$$$ LOST WAGES s buy book buy food $$$$$ REAL COST pay rent ass get bus p CCC CA Co Colle mmunit y ges The State of Higher Education in California JULY 2014 THE REAL COST OF COLLEGE Time & Credits to Degree at California Community Colleges A “two-year” community college degree is becoming increasingly rare. The time it takes...»

«Engineering Properties of Soils Recovered from Disaster Waste Mohammed Nasir Uddin ABSTRACT The 2011 earthquake off the Pacific coast of Tohoku created several serious geoenvironmental problems including the generation of huge amount of disaster debris and tsunami deposits in Japan. As a part of disaster debris management, several treatment processes were applied and at the end, a significant amount of soil fractions were recovered that contained wood fractions. From geotechnical point of view,...»

«Haircuts Female Square bob Hairdressing-Training.com Download Page 1 of 28 Square bob Its versatility has made the square bob a classic cut. The length and shape can be varied in many ways. It can be cut long, above the shoulder or short, and with or without layers. Whichever of these finished results you achieve, the haircut is still a square bob. Because it is so versatile, this haircut has also been able to move with the times and it provides a good example of how texture can be used to give...»

«One Foot In: Student-Athlete Advocacy and Social Movement Rhetoric in the Margins of American College Athletics Item type text; Electronic Dissertation Authors Broussard, William James Publisher The University of Arizona. Rights Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except...»

«George Washington University Rabbits, Ducks, and Henry V Author(s): Norman Rabkin Reviewed work(s): Source: Shakespeare Quarterly, Vol. 28, No. 3 (Summer, 1977), pp. 279-296 Published by: Folger Shakespeare Library in association with George Washington University Stable URL: http://www.jstor.org/stable/2869079. Accessed: 31/10/2011 08:27 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at....»

«Polonica Palaeontologica A cta Warszawa, 1983 pp. 369-384; pls, 7-8 V ol. 28, No. 34 CYPRIAN KULICKI and ANDRZEJ WIERZBOWSKI THE JURASSIC JUVENILE AMMONITES OF THE JAGUA FORMATION, CUBA K UL IC K I, C. a n d WIERZBOWSKI, A, : Th e Jura ssic j uv en ile a m monites of th e.Jagua Formation, Cuba. Acta Palaeont. Polonica, 28, 3-4, 369-384, 1983 (issued 1984). Early on t ogen e tic st a ges of some Ammonitina (mostly Perisphinctida e) a r e de scribed from th e Oxfordian.ra gu a Form ation of...»

«job rottweil job rottweil Jobs rottweil Ein neuer Job Ein neuer Job Bleiben Sie dran, bleiben Sie neugierig: monster.de Jobs In Rottweil Stellen in Rottweil. Stellen in Rottweil. Heute noch Ihren neuen Job finden! Jobs Im Ausland | experteer.de Premium-Jobs im Ausland finden Sie bei Experteer®. Kostenlos anmelden! Top-Jobs im Außendienst | jobware.de auf Jobware, dem Stellenmarkt für FachFührungskräfte im Vertrieb Stellenangebote Rottweil Jobs Rottweil bei Jobs.de Jobs in Rottweil....»

«NOT FOR PUBLICATION FILED UNITED STATES BANKRUPTCY COURT JA M E S J. W A LD R O N, C LE R K FOR THE DISTRICT OF NEW JERSEY [February 14, 2008] U.S. B AN K R U PT C Y C O U R T C A M D E N, N.J. B Y: /s/[Elizabeth G rassia], D eputy : IN RE: : : KYONG H. KIM, : CHAPTER 11 : Debtor. : CASE NO. 02-20654 (GMB) : : KYONG H. KIM : : Plaintiff, : ADVERSARY NO. 06-2005 (GMB) v. : : UPPER DARBY TOWNSHIP, TAX CLAIM : BUREAU OF DELAWARE COUNTY, ALLIED : PROPERTY BROKERAGE, AND RAJ KUMAR : KAPOOR, :...»

«ACT Government Gazette Gazetted Notices for the week beginning 24 January 2013 Published by Shared Services | 31 January 2013 | © Australian Capital Territory, Canberra, ACT Government Gazette | 31 January 2013 EXECUTIVE NOTICES Education and Training Variation – Transfer Michael Bateman – Director, Office of Schools (E196) Section 80A(1)(a) of the Public Sector Management Act 1994 Variation – Transfer Jayne Johnston – Executive Director, Tertiary and International Education (E606)...»

«Специальное обучение это служба, а не место. Образовательные аспекты аутистических нарушений Сентябрь 2003 г. Офис суперинтенданта народного образования [Office of Superintendent of Public Instruction] Old Capitol Building P.O. Box 47200 Olympia, WA 98504-7200 Чтобы заказать больше экземпляров данного документа,...»





 
<<  HOME   |    CONTACTS
2016 www.abstract.xlibx.info - Free e-library - Abstract, dissertation, book

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.