Nelson F. Granados

Online and Offline Demand and Price Elasticities: Evidence from the Air Travel Industry

The Internet has brought consumers increased access to information to make purchase decisions. One of the expected consequences is an increase in the price elasticity of demand, or the percent change in demand caused by a percent change in price, because consumers are better able to compare offerings from multiple suppliers. In this paper, we analyze the impact of the Internet on demand, by comparing the demand functions in the Internet and traditional air travel channels. We use a data set that contains information for millions of records of airline ticket sales in both online and offline channels. The results suggest that consumer demand in the Internet channel is more price elastic for both transparent and opaque online travel agencies (OTAs), in part, because of more leisure travelers self-selecting the online channel, relative to business travelers. Yet, after controlling for this channel self-selection effect, we still find differences in price elasticity across channels. We find that the opaque OTAs are more price elastic than the transparent OTAs, which suggests that product information can mitigate the price pressures that arise from Internet-enabled price comparisons. We discuss the broader implications for multichannel pricing strategy and for the transparency-based design of online selling mechanisms.

Designing online selling mechanisms: Transparency levels and prices

Sellers increasingly compete with innovative Internet-based selling mechanisms, revealing or concealing market information. Transparency strategy involves design choices by firms that influence the availability and accessibility of information about products and prices. We develop decision support models for suppliers to set prices for online mechanisms with different transparency levels. We then empirically analyze the price levels set by airlines across transparent and opaque online travel agencies. Our results suggest that airlines can increase profit by increasing price differentials or influencing OTA transparency differences. We also discuss application generality and limitations of our results.

How Has Electronic Travel Distribution Been Transformed? A Test of the Theory of Newly Vulnerable Markets

Information technology (IT) advances often create turmoil and disturb existing industry structures. In the travel industry, electronic distribution has existed for decades via the global distribution systems (GDSs), reservation systems that were introduced in the early 1980s on mainframe platforms. Yet with the Internet, new digital intermediaries have threatened the viability of these legacy GDSs. We examine this transformation of e-travel distribution to test the theory of newly vulnerable markets, which predicts how markets become vulnerable to fundamental changes triggered by IT. The tenets of newly vulnerable markets theory are supported. The GDS market became newly easy to enter due to a decrease in barriers to entry caused by the Internet and other technologies, attractive to attack due to their out-of-date and inefficient pricing mechanisms, which made opportunistic pickoff possible across customer profitability gradients, and difficult to defend due to their lack of vision and strategic inflexibility. We use our findings to expand the application of this theory to newly vulnerable e-markets, in general.

IT-enabled transparent electronic markets: the case of the air travel industry

The electronic market hypothesis predicts that by reducing coordination costs, information technology (IT) will shift industrial organization from hierarchical to market-based forms of economic activity. While academic researchers and practitioners have witnessed these shifts with the advent of the Internet, there is little understanding about the process and the underlying forces that drive them. In this paper, we provide an in-depth analysis of the air travel industry, which has recently experienced significant IT-driven transformations. We conclude that, together with IT, pro-competitive laws and the information-intensive nature of air travel products have triggered competition for consumers with transparent market mechanisms, which is leading to the emergence of more transparent electronic markets in the air travel industry.

Identifying Facilitators and Inhibitors of Market Structure Change: A Hybrid Theory of Unbiased Electronic Markets

The electronic markets hypothesis (EMH) in the information systems (IS) literature suggests that information technology (IT) will reduce coordination costs across firms, leading to market-based forms of economic activity. With the advent of the Internet, we have seen a move to unbiased electronic markets. However, in some industries electronic hierarchies or biased markets predominate, contrary to the predictions of the impacts of IT suggested by the EMH. We present a hybrid theory to explain how moves to unbiased markets are facilitated and accelerated by IT. This is based on electronic markets and hierarchies theory, and the theory of market design. We explore how different forces and situational factors can inhibit the move to advanced forms of market-based organization. Together, these theories offer valuable insights to understand which forces will predominate with respect to whether a vertical market will be transformed to a biased electronic market or an unbiased electronic market. We analyze mini-cases in the context of three business-to-business e-commerce settings: fixed income securities, the electric power industry, and corporate travel services. The industries we have selected exhibit different outcomes which illustrate the value of the new theory relative to predictions involving market structure transformations.

Decommoditization, Resonance Marketing, and Information Technology: An Empirical Study of Air Travel Services amid Channel Conflict

Digital intermediaries and Internet search technologies have commoditized many products, resulting in intense price competition and channel conflict. Firms use decommoditization strategies to regain control over distribution channels, as well as to implement resonance marketing and hyperdifferentiation, which allows them to improve margins through differentiation. We test two hypotheses: the decommoditization hypothesis and the resonance marketing hypothesis. We use data from an airline with a new à la carte pricing mechanism, which allows consumers to tailor airline ticket bundles to suit their individual preferences. We compare à la carte ticket pricing, whose features can be modified by the purchaser, and fixed (bundled offer) sales, which cannot be modified. We found that a significant number of travelers do use à la carte pricing, which allows the airlines to regain some control over distribution. We find that travelers customized standard bundles when it was possible for them to make à la carte ticket bookings, but mainly for low-feature standard bundles. Frequent-flyer members purchased higher-feature bundles more often when they had the opportunity. The findings support the proposed hypotheses. We discuss the implications for distribution strategy and channel conflict management.

The Emerging Role of Vertical Search Engines in Travel Distribution: A Newly-Vulnerable Electronic Markets Perspective

Information technology (IT) advances often create turmoil and disturb existing industry structures. We analyze the impact of the Internet and e-commerce technologies on digital intermediaries in the travel distribution sector. We suggest that the emerging role of meta-search agents, which act as shopbots for online travel, lead to the increasing vulnerability of existing intermediaries in the industry, especially the information infrastructure-providing global distribution systems (GDSs) and the distribution-based online travel agencies (OTAs). We base our analysis on the theories of newly-vulnerable markets and intermediation. This supports our examination of the characteristics of existing electronic distribution players in the industry that make them vulnerable to new search engine technologies. The main findings that we report are: (1) technological advances change the defensibility of e-market intermediaries to new value-adding secondary intermediaries, and (2) the value- added opportunities come from providing consumers with enhanced transparency-based price and feature search, as well as comparison capabilities. Our analysis allows us to make bold predictions about the future of the industry, and to apply our findings to other industry contexts.

Applying Systems Thinking to Knowledge Management Systems: The Case of Pratt-Whitney Rocketdyne

This paper describes PrattWhitney Rocketdynes (PWR) use of a systems thinking methodology to define and improve knowledge management (KW within the firm. Using systems thinking, the company identijed and changed key behaviors within the KM environment and effectively established a generative learning environment. This manuscript is one of the first papers that analyzes and reports a real-world application of the systems thinking methodology to improve KMpractices. We first review systems thinking concepts and adapt them to the KM context. We then present the case study of the application of systems thinking to KM at PWR. Finally, we use an inductive approach based on an analysis of the case to develop propositions on how and why the KM systems thinking methodology at PWR can be transferred to KMpractices in other organizations.

Air Canada's customer-centric model: a-la-carte pricing and technological transformation

We present a case study of Air Canadas online pricing model, which allows travelers to view and select air travel products based on transparent branded fares. Air Canadas online customers start the purchase process with a base product and fare, followed by the opportunity to upgrade to customizable price attributes and additional specific needs. This innovative pricing model, also known as a-la-carte pricing, has placed Air Canada as an industry leader in market innovation, being recently awarded the Market Leadership Award by Air Transport World. We also discuss the related technological implications for Air Canada and for the industry. Most recently, Air Canada embarked on a project to develop a state-of-the-art IT infrastructure to support their online pricing model, by replacing legacy reservation systems with advanced online technologies.

Designing Internet-Based Selling Mechanisms: Multichannel Market Transparency Strategy

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 a design dimension for Internet-based selling that involves firm choices about the level of 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. We develop an economic model of a monopolist that price discriminates across distribution channels based on their market transparency levels. The model provides normative guidelines for firms to set transparency levels and prices across distribution channels in order to maximize profits. We empirically evaluate airline pricing and market transparency 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.