À la carte pricing and price elasticity of demand in air travel

Abstract

Global distribution systems (GDSs) and online travel agencies (OTAs) have been providing critical intermediation services for the air travel services industry. Their systems services have eroded the airlines' revenue by encouraging consumers to do price comparison-based purchases though, which has caused the commoditization of air travel services. The airlines have begun to adopt à la carte pricing mechanisms in their direct distribution channel, especially through their Web sites. This way, they can provide travelers with an array of information for different airline product bundles and the flexibility to customize different bundles. This mechanism design may allow airlines to decommoditize their services in the minds of consumers. We analyze two years of data from a large international airline that sold airline tickets via several different direct and indirect distribution channels. Our results suggest that demand in the à la carte channel as a whole is less price-elastic. The results for price elasticity for different market segments and bundle types across channels were not altogether consistent with our predictions though. We find that, for some branded bundles of services, price elasticity is lower in the à la carte channel, and for others it is higher. We discuss the implications for managers and the design of à la carte selling mechanisms.