Online and Offline Demand and Price Elasticities: Evidence from the Air Travel Industry

The Internet has brought consumers increased access to information to make purchase decisions. As markets come closer to perfect information, one of the expected outcomes is an increase in competition. One of the consequences is an increase in the price elasticity of demand, or the percent change in demand due to a percent change in price, because consumers are better able to compare offerings from multiple suppliers. In this paper, we analyze the impact of the Internet on demand, by comparing the demand functions in the Internet and traditional air travel channels. We use a data set that contains information for millions of records or airline ticket sales in both offline and online channels. To our knowledge, this is the first study that uses massive sales data to compare consumer demand functions in the two channels. The results suggest that consumer demand in the Internet channel is more price-elastic for both transparent and opaque online travel agencies. We also find that the opaque OTAs are more price-elastic than the transparent OTAs. These results are after controlling for the different mix of business and leisure travelers across these travel agency types. We discuss the broader implications for multi-channel pricing strategy and for the transparency-based design of online selling mechanisms.