How the Internet Influences Price Dispersion Essay

The article I have chosen to analyze is “How the internet influences price dispersion? Evidence from the airline industry.” Airline industries have been receiving information from the global information distribution systems; these include the computer system that was introduced in the 1970s, and it was aimed at automating and controlling the distribution of tickets.

This technology eased and expedited the work of travel agents though the travelers were required to pay a certain amount of commission to the travel agents. Travel agents are considered to be the most efficient distributors of tickets, but some airline firms chose to sell the tickets through their call centers.

Airline firms provided incentives to travel agents who sold a lot of tickets. The emergence of the internet has radically altered this pattern since on the side of supply, various airline companies have turned to developing their own websites to enable them to sell tickets cheaply and to enable them avoid paying fees and commissions to travel agents. By developing their own websites, airline companies will be able to lock-in loyal customers. Purchasing tickets online has been established to be cheap (Orlov 22).

Questions on the Article

The paper seeks to analyses the effect of the Internet on the airline fares within certain airline companies, in particular, routes. The following are the questions that the article seeks to answer: first, the author examines the reasons for the persistence in price dispersion in homogeneous markets, second is that the article examines the relationships between the search costs and price dispersion and price comparison.

The article also measures the effect of the internet on price dispersion and the challenges it poses. Another question that the article seeks to answer is the effect of the Internet on prices and costs across and within firms and how they are affected by the Internet. The article generally seeks to analyze an effect of the Internet on price distribution.

Summary of how the author answers the questions

Reasons for persistence in price dispersion: this is analyzed based on the routes and the airlines firms, and it is computed across tickets that have different qualities, and limited attention is paid to tickets across the various routes. This is also analyzed based on the varying market structure of various routes.

Relationship between search costs and price dispersion: the article posits that any decrease in the costs of searches that are linked with the Internet has the net effect of increasing intra firm price dispersion and it reduces the prices of inter firm price dispersion (Orlov 27).

Effect of the Internet on price dispersion: this is analyzed by quantifying the level of Internet penetration, the market structure variables and the percentage of consumers with the Internet. The increase in the price dispersion is witnessed when there are changes on the adoption of the internet within each airline on the same route.

The effect of prices on the Internet depends on route market structure and the airline firm and the higher penetration of the Internet among the consumers has the effect of lowering the prices of fare on particular route. The Internet has the effect of reducing prices, and it facilitates competition, and it creates down ward pressure on airline fares.

Effect of the Internet on price dispersion both within and outside airline: Internet has a lot of effect on price dispersion in both intra and inter-firm prices. This is because the Internet facilitates efficient ticketing among airline firms, and it also makes it difficult for new firms to enter the market hence minimizing competition within the industry while maximizing air ticket sales (Orlov 25).

How convincing the research was

The research is convincing since it acknowledged the changes that characterize air specific fares and hence to confirm it, there is a more vivid analysis of constrained airline route based on fixed quarter effect in order to verify the results. The paper seeks to demonstrate that intra firm price dispersion increases with increasing penetration of the Internet.

Book by Mills, Juline and Law, Rob

This book has a paper that seeks to examine how Internet-based travel has affected tourism markets all over the world. The Internet-based travel has affected the pre-purchase consumer search. The electronic markets have heavily benefited from the increasing potential and capability of information technology because information can be disseminated at a faster rate.

The electronic exchange of information through the Internet and other effects of electronic commerce or consumer search have demonstrated inconsistent support for the growth of high and efficient electronic market for consumers. There are substantial cases of price dispersion that exist in the electronic markets for both books and discs whereas separate prices are considered to be low.

Price dispersion of price for domestic airline tickets that is offered by travel agents in the USA has been indeed established by the research of Clemons et al. that was done in 2002. Provisional evidence indicates that the advantages of web are considered to be smaller while the uncertainties are very high (Mills and Law 5).

Various previous researches have employed a lot of measures in pricing like the average price principle and price dispersion to analyze the electronic search of information in consumer markets. This research and product provide valuable information on the relevance and efficiency of the Internet as a source and product of information, but they have some weaknesses and limitations that have to be addressed to increase the confidence in the results (Mills and Law 3).

The paper analyses the effect of the Internet based electronic markets on the consumers’ search on tourism and travel industry and elaborates whether consumer search in electronic markets when compared with conventional network. The increased variation on consumer search by consumers in the travel and the tourism industry is primarily motivated by the varying characteristics.

Consumers prefer services of low complexity due to their high knowledge that suits automated distribution of information. Based on the principle of information economics, which dictates that the changing identity of sellers and buyers in demand and supply might result in a situation of uncertainty because, information becomes often obsolete.

It has been established that Internet shoppers are less price and brand conscious than non stoppers because, according to them, convenience is what drives the use of internet markets.

The article argues that consumers using the web are more prices sensitive, conscious of the product and quality since they seek to advance convenience than those consumers who abstain from using the web and internet marketing.

From the statistical analysis in the article, it is established that majority of the consumers who search for travel services on the web also use conventional information services. The web and the Internet have not been effective as a source of information, but it is a reliable source of information.

The web as been established as a complementary source of information that provides the consumers with easy access to electronic version of travel catalogues and information regarding to inventory when the prospective sellers are identified (Lyons 87).

According to the observed travel services’ market, the hypothesis concerning electronic markets and electronic commerce on differentiated consumer markets reveals that travel decisions are affected by a lot of factors and forces outside the control of the individual. Findings from the article indicate little evidence of electronic markets that lead to quantifiable consumer search and measurable price dispersion.

Book by Linda A. Bartlette, Ida F. Lawson

The book analyses prices and the Internet: various economists have had the expectations that the Internet which has facilitated the emergence of cheap and efficient price search mechanisms often lead to lower prices.

The studies that have been conducted after the resurgence and emergence of the Internet as modes of pricing have established that online or Internet prices are deemed to be high.

Pricing and marketing techniques have been revolutionized with the emergence of the Internet. Studies on Internet pricing have been growing sophisticated over time, and prices have been reduced due to the Internet or online factor. Research by Verlinda and Lane established that there is an increase in all unrestricted airline fares when relatively compared with the restructured and restricted fares as the Internet searches that have increased.

Internet pricing has provided travelers with flexibility in their travel plans. Airline fairs had been subjected to various comparisons between Internet ticketing when compared with travel agents who are an indication that an increase in information is great for pricing.

The convergences in airline ticketing stems from various several changes in the air travel market, and it was necessitated by the launch of several online ticketing agencies as well as the efforts of the airline ticketing to promote and enhance direct ticketing websites have substantially changed the on line travel market (34).

There have been increased online travel agencies because of the preferences by consumers to buy air tickets on the Internet (Barlette and Lawson 33).

The evidence from Internet studies is a mixed one, and it is possible that the Internet purchasers have the willingness to pay higher prices to purchase tickets on the Internet because of its capability to facilitate the reduction in all other supplementary costs like commissions to the agents and other accrued advantages.

The emergence of the Internet has had mixed and complex effects on the marketing and pricing strategies. The Internet provides sophisticated price comparison’s tools that have had the effect of reducing prices and enhancing price dispersion for the people who use them. Internet ticketing also provides an opportunity for the consumers to access direct price comparisons hence helping to reduce prices due to the availability of consumer pricing comparison sites.

Prices that arrive via the price comparison sites are comparatively lower when compared to the prices that are available at the agent or vendor website. Internet pricing demonstrates the principle of the winner take all systems hence making it hard for other new firms to join the market (Barlette and Lawson 35).

Article 2 by James D. Dana, Jr. and Eugene Orlov

The article argues that airlines regulatory fly below capacity planes since they set fares before observing demand. Even if the airlines set an accurate price forecast, it is their ability to use revenue and price management to smooth demand, which is often constrained by the amount of information that consumers have regarding the prices and the price schedules or the consumer search costs. The recent increase in the use of the Internet by the consumers to buy tickets is a reason for increased airline capacity utilization.

The Internet has dramatically lowered and reduced search costs, and it has revolutionized purchasing decisions by minimizing market frictions. Several researches have demonstrated the economic impact of the Internet on the impact of low search costs on the air ticket prices.

The Internet provides consumers with the available information regarding the products, alternative carriers and the departure times. The Internet has made it possible for consumers to buy tickets on the airlines’ websites and avoid the unnecessary costs incurred by purchasing tickets from agents.

By using the Internet, the costs’ savings of purchasing tickets can always be offset by a decrease in consumer surplus that might choose to travel at the least convenient times. Price, market structure, capacity and sales are considered the primary variables that vary with exogenous features of price of tickets of each airline and the city pair market (Dana and Orlov 2).

Success of the literature in increasing understanding of the issues

Both the book and the articles have attempted to analyze the relationship between the Internet and price dispersion and specifically on the airline or the travel industry as well as the tourism industry. The chosen article is comprehensive in its analysis, and it seeks to capture all the aspects of airline ticketing and provides an insight into airline ticketing.

All the authors who have written on the subject argue that air ticket prices are considerably low when Internet ticketing is used. It also established that airline companies make a lot of profit when they apply Internet ticketing because middlemen are eliminated and commissions paid to the agents will be reduced or eliminated completely (Martin 47).

The writers also introduce to fore the core factors that govern European completion policy, particularly in tourism and airline industry. Both papers have some considerable degree of data to provide an insight into the impact of Internet purchases on airline ticket prices.

They analyze both the direct effect of the Internet purchases on the prices paid and the increased route shares of purchases through the Internet on the dispersion and level of prices. The effect of market concentration and hubbing on the dispersion of airline prices is also brought to fore.

The Internet has renewed the way business is carried out and has given a new dimension on how demand for services is stimulated thereby affecting the price. Electronic commerce which is made possible through the Internet has made it possible for costs to be cut at the same time availing variety to the consumers.

It is evident that selling of tickets and the Internet commerce has flourished in the recent times. The penetration of the Internet has been substantially felt on the airline industry where Internet purchase exceeds fifty percent of the transactions (Sengupta and Wiggins 1).

Works Cited

Barlette, Linda, and Lawson Ida. Health Care Policies. New York: Nova Publishers, 2008. Print.

Dana, James, and Orlov Eugene. Internet Penetration and Capacity Utilization in the US Airline Industry. Stanford: Graduate School of Business, 2011. Web.

Mills, Juline, and Law Rob. Handbook of Consumer Behavior, Tourism, and the Internet. New York: Routledge, 2005. Print.

Lyons, Peter. Cases in European competitions policy. The economic analysis. Cambridge, UK: Cambridge University Press, 2009. Print.

Orlov, Eugene. “How the internet influences price Dispersion? Evidence from the airline industry.” Journal of Industrial Economics 58.1 (2011): 21-37. Print.

Martin, Sammy. Industrial organization in context. Oxford: Oxford University Press, 2010. Print.

Sengupta, Anirban, and Wiggins Steven. Airline Pricing, Price Dispersion, and Ticket Characteristics On and Off the Internet. Texas A&M University, 2006. Web.