The Name-Your-Own-Price Channel in the Travel Industry: An Analytical Exploration

Name-your-own-price (NYOP) retailers, such as Priceline, offer an alternative distribution channel for service providers in the travel industry such as airlines, hotels, and car rental companies. Our research employs an analytical model to identify and understand key trade-offs driving the decision by a service provider to employ an NYOP channel, assuming that such a channel is available. This decision requires the existence of forces that counteract the adverse consequences of cannibalization of sales through traditional posted-price channels. Our analysis provides some insight into these forces. Contracting with the NYOP retailer facilitates market segmentation and price discrimination, and allows for disposal of excess capacity after meeting business travel demand. However, the cost of this flexibility is that the service provider can no longer credibly precommit to maintaining high prices when there is unsold capacity. Also, when contracting with an independent retailer, the service provider is unable to extract the entire revenue generated from NYOP consumers. A key insight from our model is that the rationale for contracting with an NYOP retailer is driven by the uncertainty in business travel demand, not the expectation of excess capacity. Indeed, all else equal, the larger the capacity, the less likely it is that contracting with an NYOP retailer is the right decision on the part of the service provider.