The Nature of Competition in Electronic Markets: An Empirical Investigation of Online Travel Agent Offerings

Several authors have argued that because modern computing and communications technologies reduce buyer search costs and other market inefficiencies, there should be intense price competition between sellers in electronic markets. This paper examines this prediction using data on the airline ticket offerings of online travel agents (OTA). We find that different OTAs offer tickets with substantially different prices and characteristics when given the same customer request. Some of this variation appears to be due to product differentiation -different OTAs specialize by systematically offering different tradeoffs between ticket price and ticket quality (minimizing connections, depart or return when requested). However, even after accounting for differences in ticket quality, ticket prices vary by as much as 18% across OTAs. In addition, OTAs return tickets that are strictly inferior to the ticket offered by another OTA for the same request between 2.2% and 28% of the time suggesting that this price dispersion is not a modeling artifact. We conclude that this market is not characterized by perfect competition, but find that OTAs engage in both horizontal product differentiation and price discrimination in addition to simply having some degree of random inefficiency. Our results further suggest that product differentiation is an important component of strategy for electronic markets, even in goods with relatively simple and unambiguous product descriptions.