Price discrimination with opaque products

Abstract

In opaque selling, firms intentionally withhold key information concerning some products to create an opaque product type. For example, at Hotwire and Priceline, airlines and hotels sell tickets and hotel rooms without revealing flight and hotel information. With opaque selling, firms can segment the market, and charge a discounted price in the opaque market and a published price in the full-information market. Thus opaque selling in the travel industry enables firms to manage capacity utilisation efficiently, and to discriminate among customers, especially close to the consumption period. In this paper, we focus on the optimality of opaque selling, and investigate when it improves profits and how to set opaque and published prices. We find that depending on customer heterogeneity, opaque selling sometimes can simultaneously increase a firm's sales and profits. While the resulting social welfare benefits can increase or decrease, Pareto improvements are possible when customers are more differentiated in their willingness to pay. We also find that opaque selling is not always optimal. When customers are too heterogeneous, even with excess capacity, the firm will serve only high-value customers with full-information products, and ignore low-value customers. Our study provides guidelines for retailers, firms in the travel industry, and other service providers as long as the opaque nature of this new selling method enables them to effectively segment the market. For these service providers, opaque selling is a creative strategy through which they can efficiently manage existing resources and substantially improve profits. Our findings provide guidelines for policy makers on when to encourage and when to control opaque selling.