Demand and Revenue Impacts of an Opaque Channel: Evidence from the Airline Industry

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Authors: Nelson F. Granados, Kunsoo Han, Dan Zhang

Publication: Production and Operations Management, Forthcoming

Abstract: 

Over time, opaque intermediaries, such as Hotwire and Priceline.com, have become an established distribution channel for the travel industry. We use a market response model and a dataset of economy class reservations from a major international airline to empirically examine the demand and cannibalization effects of the opaque channel.

We find that:

(1) the impact of the opaque channel on total demand is positive and significant in markets with high levels of competition; and

(2) overall, the opaque channel cannibalizes the online transparent channel, but not the offline channel nor the full-fare segment.

However, we find that cannibalization of the offline channel moderately increases as markets become more concentrated. These results together suggest that airlines can benefit from opaque offerings mainly in markets with high levels of competition. Further, we develop a methodology to assess the revenue impacts of the opaque channel and show how it can be used by managers to develop and implement pricing tactics to increase demand and decrease cannibalization.

Read full abstract: Production and Operations Management