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

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  • Nelson Granados
  • Kunsoo Han
  • Dan Zhang

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.

Suggested Citation

  • Nelson Granados & Kunsoo Han & Dan Zhang, 2018. "Demand and Revenue Impacts of an Opaque Channel: Evidence from the Airline Industry," Production and Operations Management, Production and Operations Management Society, vol. 27(11), pages 2010-2024, November.
    • Handle: RePEc:bla:popmgt:v:27:y:2018:i:11:p:2010-2024
    DOI: 10.1111/poms.12704
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    Cited by:

    1. Alonso, Juana M. & Socorro, M. Pilar, 2024. "Blind booking: The effects on passengers' purchase decision, airlines’ profitability, and tourist destinations," Research in Transportation Economics, Elsevier, vol. 105(C).
    2. Klein, Robert & Koch, Sebastian & Steinhardt, Claudius & Strauss, Arne K., 2020. "A review of revenue management: Recent generalizations and advances in industry applications," European Journal of Operational Research, Elsevier, vol. 284(2), pages 397-412.
    3. Zhang, Yi & Hua, Guowei & Cheng, T.C.E. & Zhang, Juliang & Fernandez, Vicenc, 2020. "Risk pooling through physical probabilistic selling," International Journal of Production Economics, Elsevier, vol. 219(C), pages 295-311.
    4. Adam N. Elmachtoub & Michael L. Hamilton, 2021. "The Power of Opaque Products in Pricing," Management Science, INFORMS, vol. 67(8), pages 4686-4702, August.
    5. Zhang, Zihao & Zhang, Mengying, 2024. "Pricing and Capacity Allocation in Opaque Selling," European Journal of Operational Research, Elsevier, vol. 318(1), pages 230-241.

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