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Competition and Price-format Adoption in the U.S. Airline Industry: A Study of EDLP Implementation on the Internet

Authors Sin, Raymond G
Chellappa, R. K.
Siddarth, S.
Issue Date 2009
Source Conference on Information Systems & Technology (CIST) , San Diego, October 10-11, 2009
Summary Research in marketing suggests that creating and maintaining a certain price image among consumers is a strategic choice made by many retailers. While “Dollar Stores”, 99 cent price-endings, etc., fall in this category, one key method of execution of these price-image strategies is through the employment of particular price-formats (Ortmeyer et al. 1991). The two end-points of such a price-format strategy are the “everyday low price” (EDLP) format and a price-promotion (HILO) format. While the former is generally associated with a strategy of charging consistent and low average prices, the latter is associated with deals, discounts and promotions. The success of EDLP strategy is related to the presence of time-constrained consumers who are not able or willing to shop around, as well as large basket shoppers, whose store choice decisions rely heavily on the expected overall basket price (Lal and Rao 1997; Bell and Lattin 1998). Although EDLP has been studied only as a component of retail competition, and mostly in the context of grocery stores and supermarkets, Hoch et al. (1994) suggest that this strategy is also implemented by airlines, automobile manufacturers, warehouse operators and others. A recent work (Chellappa et al. forthcoming) points out that in the airline industry, Southwest and Jetblue practice the EDLP price-format and that such vendor strategies are one important source of overall price dispersion in the market. While this work has largely investigated market-level aspects leading to price dispersion, there is little or no understanding on the actual operationalization of EDLP strategy, particularly in electronic markets. Prior research (Hoch et al. 1994; Shankar and Bolton 2004) suggests that while EDLP and HILO are distinct price-formats, firms often position themselves on a continuum of these two formats rather than on the extremes. This statement warrants further investigation in the airline industry, specifically in the online context since two fundamental factors that are important to the success of EDLP in the physical, retail, supermarket context are not observed in this industry. First, the concept of “basket-shopping” is irrelevant. Airline passengers, unlike supermarket shoppers, do not shop for a “basket of products” but typically purchase only one or two tickets at a time while being repeat purchasers over time. Second, geographical separation from competitors is irrelevant as airlines largely sell tickets directly (or through online travel agents) to consumers via online channels. This makes search costs relatively negligible and price comparisons much easier than in physical markets. Further no firm can consistently offer the lowest price in the market for all products all the time, hence it becomes important investigate how an EDLP firm strategically manages its “every day” and “low price” dimension of its format. To do so, our research first establishes empirical metrics from marketing literature to capture these two dimensions. Then we build on extant research on airline pricing and identify different market and competitive conditions that airlines face when setting prices. Subsequently we examine the different ways in which EDLP set prices under each of these conditions.
Language English
Format Conference paper
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