The Name-Your-Own-Price Channel in the Travel Industry: An Analytical Exploration

Abstract

ABSTRACT'Name-Your-Own-Price' (NYOP) retailers, such as Priceline, offer an alternative distribution channel for service providers in the travel industry such as airlines, hotels, and car rental companies. Our research employs an analytical model to identify and understand key tradeoffs driving the decision by a service provider to employ an NYOP channel, assuming that such a channel is available. This decision requires the existence of forces that counteract the adverse consequences of cannibalization of sales through traditional posted-price channels. Our analysis provides some insight into these forces. Contracting with the NYOP retailer facilitates market segmentation and price discrimination, and allows for disposal of excess capacity after meeting business travel demand. However, the cost of this flexibility is that the service provider can no longer credibly pre-commit to maintaining high prices when there is unsold capacity. Also, when contracting with an independent retailer, the service provide is unable to extract the entire revenue generated from NYOP consumers. A key insight from our model is that the rationale for contracting with an NYOP retailer is driven by the uncertainty in business travel demand, not the expectation of excess capacity. Indeed, all else equal, the larger the capacity, the less likely it is that contracting with an NYOP retailer is the right decision on the part of the service provider.

The causes of misapplied capacity related manufacturing costs and corresponding reporting implications: A conceptual perspective

“…This more comprehensive approach to the reporting, analysis, and disposition of misapplied capacity costs is necessary if significant erroneous managerial reactions to traditionally reported Production Volume Variance information, and significant misstatements of those assets and expenses whose valuation includes a FMO component, are to be avoided. Further, while a ''traditional'' manufacturing context was employed in this paper, the methods discussed for more effectively managing capacity costs likely generalize to non-manufacturing sectors concerned with management of capacity costs, such as the health care industry (e.g., Gnanlet & Gilland, 2009;Kelemen, MacArthur, & Menzel, 2007) and other areas of the service sector including banking (e.g., McDonald & Spaller, 2007), retail (e.g., Duan & Mela, 2009;Xu & Leung, 2009) and travel (e.g., Wang & Chatterjee, 2009) industries. Although capacity costs for these non-manufacturing sectors are more subtle in nature, given their period cost classification typically shown as ''selling, general, and administrative expenses,'' they are still significant and typically represent IT investments (see Tallon, 2010;Tallon & Scannell, 2007 for a discussion of management of IT data storage costs), depreciation, rent, staff salaries, etc.…”

Naming your own price mechanisms: Revenue gain or drain?

“…First, there might be reasons that are not captured in our environment and that can make firms strictly prefer to use the opaque feature. For example, as Wang et al (2009) argue, using opaque agencies enables firms to be more flexible in price setting -especially having an excess in available capacity -without a fear of compromising an individual brand or pricing policy. Another rationale behind the opaque feature comes from the fact that the Priceline customers are more likely to purchase the same product many times (e.g.…”

“…For example Northwest Airlines discontinued its relationship with Priceline on June 2002 for being increasingly concerned with Priceline's business model. The hotel industry expressed similar concern on the long-run risk of Priceline in cannibalization from primary selling channels(Wang et al, 2009). 7 Similar evidence comes from eBay where bidders would sometimes bid higher for goods being auctioned than the buy-it-now price for another available unit of the same good(Lee and Malmendier, 2008).…”

Optimal Reverse-Pricing Mechanisms

“…Terwiesch, Savin, and Hann (2005) discuss the influence of frictional costs on the optimal bid-acceptance threshold. Wang, Gal-Or, and Chatterjee (2009) and Fay (2009) provide two different rationales for the existence of the reverse-pricing channel in addition to a posted-price channel, either used by the same retailer or used by two different retailers, respectively. Amaldoss and Jain (2008) analyze joint bidding for multiple items at a reverse-pricing retailer and find that such joint bids can increase retailer profit.…”