Price-Formats as a Source of Price Dispersion: A Study of Online and Offline Prices in the Domestic US Airline Markets

Information Systems Research, Vol. 22, No. 1, pp. 83-98

36 Pages Posted: 5 Jun 2007 Last revised: 23 Apr 2012

See all articles by Ramnath K Chellappa

Ramnath K Chellappa

Emory University - Goizueta Business School

Raymond G. Sin

The University of Hong Kong

Sivaramakrishnan Siddarth

University of Southern California - Marketing Department

Date Written: December 1, 2007

Abstract

A large body of research in economics, information systems and marketing has sought to understand sources of price dispersion. Previous empirical work has mainly offered consumer and/or product based explanations for this phenomenon. In contrast, our research explores the key role played by vendors’ price-format adoption in explaining price dispersion. We empirically analyze half-million online and offline prices offered by major U.S. airlines in the top 500 domestic markets. Our study shows that a vendor’s price-format remains an important source of price dispersion in both channels even after accounting for other factors known to impact dispersion in airline ticket prices. Importantly, this finding is true for both transacted and posted tickets. We document several other interesting empirical findings. First, the lower variance in the prices of EDLP firms serves to reduce the market-level dispersion in prices when such firms are present. Moreover, the price variance of non-EDLP firms in these markets is also lower than in those markets in which EDLP competitors are absent. Second, we also find that dispersion in offered prices increases closer to the departure date, which is consistent with theoretical assertion that price dispersion increases with reservation prices. Finally, we continue to observe dispersion of online prices even after accounting for vendor strategy and other known sources of dispersion, suggesting that the prices are unlikely to converge even in the presence of sophisticated online search mechanisms.

Keywords: online markets, price dispersion, airline industry, hierarchical linear modeling

JEL Classification: D4, C5, L9

Suggested Citation

Chellappa, Ramnath K. and Sin, Raymond G. and Siddarth, Sivaramakrishnan, Price-Formats as a Source of Price Dispersion: A Study of Online and Offline Prices in the Domestic US Airline Markets (December 1, 2007). Information Systems Research, Vol. 22, No. 1, pp. 83-98, Available at SSRN: https://ssrn.com/abstract=991156 or http://dx.doi.org/10.2139/ssrn.991156

Ramnath K. Chellappa (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
(404) 727 7599 (Phone)
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Raymond G. Sin

The University of Hong Kong ( email )

School of Business
HKU
Pok Fu Lam
Hong Kong

Sivaramakrishnan Siddarth

University of Southern California - Marketing Department ( email )

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

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