Market Transparency and Multi-channel Strategy: Modeling and Empirical Analysis of Online Travel Agents

ABSTRACT The Internet has transformed the nature of business-to-consumer transaction-making practices in many industries. Sellers now attract customers with innovative Internet-based selling mechanisms that can reveal or conceal market information. We define market transparency as the availability and accessibility of information about products and prices. Firms can influence market transparency either by designing and implementing their own Internet-based selling mechanism, or by offering their products through an existing electronic market or brick-andmortar channel. We develop an economic model of a monopolist that can set heterogeneous transparency levels and price discriminate across distribution channels. The model provides normative guidelines for firms to set relative transparency levels and prices in order to maximize profits. We empirically evaluate pricing and market transparency strategy in the U.S. air travel industry to show the applicability of these guidelines. The evidence suggests that relative prices and transparency levels across the Internet and traditional air travel channels are sub-optimal.