Use of opaque sales channels in addition to traditional channels by service providers

Abstract

Motivated by the recent opaque selling trend promoted by Priceline and Hotwire, this study examines a game in which two collaborative service providers may use an opaque selling channel to satisfy demand from both leisure and business customers. Further, the service providers must make a strategic decision as to which opaque selling channel is more profitable: posted price (PP) or name your own price (NYOP). By comparing the profits from the three cases (traditional single channel, traditional and PP dual channel, and traditional and NYOP dual channel), we find some interesting results driven by the strategic interaction between two service providers and by the heterogeneity of customers. Firstly, a dual channel offers advantages over the single traditional channel, as opaque selling allows service providers to utilise customers’ heterogeneity, and thus facilitates price discrimination and customer segmentation. Secondly, choosing the traditional and NYOP mechanism enables service providers to optimise profits when the proportion and valuation of business customers, the opacity of the service, and the leisure customers’ degree of pessimism are all relatively high. Lastly, the traditional and NYOP combination outperforms the traditional and PP mechanism as a result of the relatively large pessimistic state of leisure customers.