Demand and Revenue Impacts of the Opaque Channel:

Opaque selling is a mechanism whereby a seller conceals product or price information from buyers prior to purchase. Over time opaque intermediaries, such as Hotwire and Priceline.com, have emerged as an established distribution channel for the travel industry. The opaque channel has two countervailing effects: it can increase sales by attracting price-sensitive travelers who may otherwise not purchase, but it may also cannibalize sales from the transparent online channel (e.g., Orbitz, Expedia) or the offline channel (e.g., traditional travel agencies). While the extant analytical literature has examined these two effects, there is a paucity of empirical research that investigates the net impact of these effects and the overall viability of the opaque channel. We use a market response model and a massive dataset of economy class reservations from a major U.S. airline to empirically examine the demand generation and cannibalization effects of the opaque channel. We find that: 1) The opaque channel cannibalizes the online transparent channel but not the offline channel. This cannibalization occurs mainly in the discounted segment, but not in the full-fare and superdiscounted segments. We find significant cannibalization in low-, but not high-competition markets. 2) The opaque channel is viable in high-competition markets, where it increases total sales volume and does not cannibalize the transparent channel. Furthermore, we develop an empirical model to estimate the impact of prices across different channels on revenue, and we apply it to the opaque channel. The results suggest that the airline can substantially increase its revenues by reducing opaque fares in high-competition markets and by raising them in low-competition markets and during the low season.