©2011 INFORMS Price Formats as a Source of Price Dispersion: A Study of Online and Offline Prices in the Domestic U.S. Airline Markets

Alarge body of research in economics, information systems, and marketing has sought to understand sourcesof price dispersion. Previous empirical work has mainly offered consumer- and/or product-based expla-nations for this phenomenon. In contrast, our research explores the key role played by vendors ’ price-format adoption in explaining price dispersion. We empirically analyze over a half-million online and offline prices offered by major U.S. airlines in the top 500 domestic markets. Our study shows that a vendor’s price format remains an important source of price dispersion in both channels even after accounting for other factors known to impact dispersion in airline ticket prices. Importantly, this finding is true for both transacted and posted tickets. We document several other interesting empirical findings. First, the lower variance in the prices of “everyday low price ” (EDLP) firms serves to reduce the market-level dispersion in prices when such firms are present. Moreover, the price variance of non-EDLP firms in these markets is also lower than in those markets in which EDLP competitors are absent. Second, we also find that dispersion in offered prices increases closer to the departure date, which is consistent with theoretical assertion that price dispersion increases with reservation prices. Finally, we continue to observe dispersion of online prices even after accounting for vendor strategy and other known sources of dispersion, suggesting that the prices are unlikely to converge even in the presence of sophisticated online search mechanisms. Key words: online markets; price dispersion; airline industry; EDLP; hierarchical linear modelin