Image Pricing: Airline Competition on the Internet

Pricing and positioning are among the most important strategic decisions for every online firm in today’s competitive environment. Traditionally retailers adopt different price formats as store positioning and segmentation strategies by signaling to consumers their specific pricing structures. In particular, “everyday low price” (EDLP) has proved to be a successful strategy for vendors in physical markets in creating a “low price” image and persuading consumers that regardless of what item they buy or when they buy it, they can always expect below average prices. While managing this perception is much easier when it is costly for consumers to compare prices across geographically separated stores, the advent of electronic commerce has significantly reduced search and menu costs, allowing consumers to search multiple stores with a few mouse clicks and competitors to immediately react to any price change at the individual-product level, hence posing serious challenges to sellers adopting EDLP in electronic markets. Using a hierarchical modeling approach and 272,406 unique price observations on airline tickets obtained from seventeen U.S. carriers online, this study examines the role of price format adoption in competition in electronic markets. Specifically, this research aims to address the following questions: 1) Do self-declared EDLP airlines indeed charge stable, low prices online? 2) Is EDLP being adopted in electronic markets in the same fashion as in physical markets? 3) Do they adopt different price formats in different product categories? Our findings offer the first formal evidence of the adoption of a “hybrid” strategy of implementing different price formats in different product categories in electronic markets. Further, online EDLP airlines focus more on the “within-market” characteristics of this pricing strategy rather than the temporal characteristics, implying a diminishing role of intertemporal price consistency to EDLP in online markets. This suggests that reduction in search cost in electronic markets may have differential effects on consumers’ price elasticity along two dimensions: by making price information more accessible, consumers may focus on the comparison of “spot prices” when they perform the search. However, due to the large amounts of information available at the time of search, recall may be poor. As a result, electronic markets may increase consumers’ price sensitivity at any given point in time when they perform price comparison but have a negative effect on consumers’ intertemporal price sensitivity, suggesting that even sellers who pursue an everyday low price strategy online may find temporal price discrimination profitable. Economics and Information Systems 246 Twenty-Seventh International Conference on Information Systems, Milwaukee 2006