Can You See What I See? Transparency, Consumer Demand and Strategic Pricing in B2c Electronic Commerce

Internet technology has transformed the nature of business-to-business (B2B) and business-toconsumer (B2C) transaction-making practices. One of the significant areas of impact has occurred with respect to the transparency of markets for end-consumers in many industries, including the market mechanisms, the prices, the quantities bid and offered, and the participating buyers and sellers. In the context of this recent reduction in the informational asymmetries of the marketplace, we propose a new theory-based framework to evaluate the effects of the changed level of market transparency on the strategic pricing decisions of a B2C firm, and their subsequent effects on consumer demand. Market transparency is defined as the level of availability and accessibility of information about the transaction-making process and the product that is exchanged. We develop an economic model that allows us to examine the impacts of different levels of market transparency in the presence of firm-level strategic pricing decisions on consumer demand in the marketplace. We apply the findings from the model to the online travel agency (OTA) industry, where novel mechanisms with different degrees of transparency have emerged in recent years (e.g., Hotwire, Expedia, Orbitz, Travelocity and Priceline.com). Our results indicate that firms can take multiple approaches to increase their revenues by matching pricing decisions to the level of transparency provided by their market mechanism, which we now recognize as a key parameter of organizational strategy.