Luring Customers on Search Platforms Using List Price: A Theoretical and Empirical Analysis

Description

On travel websites, such as Expedia.com and Trip.com, consumers can search through countless sellers, to find information about products, such as hotels and flights. To make a reservation, a consumer must click a seller's link on the search result page, where only an information summary is available for entries in a list of products. Among the most salient information on this search result page is the list price, or the lowest price of the base product; for example, a list price might show the price of a non-refundable single-occupancy room or an economy cabin flight ticket. This list price may differ from the final price that a consumer eventually pays because the base product may have been sold out (capacity constraint), or the consumer may want to buy more costly product, or include add-ons, such as breakfast, Internet, or parking (add-on pricing). This project seeks to study the effect of the list price displayed on the search result page on consumers' click decisions, and eventually on their purchase decisions. Given an understanding of this effect, we will identify the sellers' optimal list pricing strategy under competition. In particular, we ask whether the revealed list price can be informative about the concealed premium price. To achieve these research objectives, we first analyze a game-theoretic model, which captures two main features of the pricing game on this platform: capacity constraint and add-on pricing. We then test the theoretical findings empirically using individual-level click-stream data from a major international travel website. Findings in the project will provide practical guidance for sellers on search platforms about which prices to show consumers on the search result page in order to increase click-through and conversion rates. Finally, we offer insights into how the platform should rank sellers based on their list prices, in addition to other information, such as customer ratings.