1 Airline Passengers ’ Online Search and Purchase Behavior: New Insights from an Interactive Price Response Model Managerial Insight Statement

In many industries, the internet has increased price transparency and led to fierce price compe-tition. We propose a new business model that leverages the strength of the internet- specifically the ability to interact directly with its consumers- to customize prices for individual consumers in ways that do not trigger price responses by the competition. A web-based Interactive Pricing Response (IPR) system was developed for Freedom Air, a former low cost subsidiary of Air New Zealand. By targeting highly time-flexible travelers, the IPR system provides a mechanism by which airlines can generate incremental revenue by selling distressed inventory to price-sensitive consumers who are highly time-flexible (e.g., willing to travel any week within a four-week period). Empirical results show customer search and purchase behavior is highly predictable and driven by relative discounts. Most important, customer behavior can be directly integrated into the IPR system, effectively allowing managers to set conversion rates and relative discount rates offered in the market as a function of two key customer searching parameters. We believe that non-aviation industries can adapt our business model to target price-sensitive customers willing to delay pur-chases in exchange for discounts, thereby allowing firms to more effectively manage supply and demand without making discount levels transparent to competitors.