Travel Reference
In-Depth Information
products or services will only achieve maximum profi ts through this pricing method where
consumers' evaluation of the product offer is homogenous and there is no consumer surplus.
As such, 'price discrimination is at the heart of pricing RM tools' (Ivanov and Zhechev
2012: 181). Simply put, different market segments are charged different prices for the same
inventory units (e.g. rooms, airline seats) based on differences in price sensitivity and willingness
to pay. For example airline business travellers are less price-sensitive and are willing to pay higher
prices compared to leisure travellers. What prevents the migration from high to low products and
services is the use of rate fences (Zhang and Bell 2010; Mauri 2012). These are the rules or
criteria that companies use to prevent customers migrating from high to low priced services and
products. Physical fences can include such things as, for example, the location of a hotel room or
view from a room and the provision of add-on amenities. Non-physical fences can include day
of the week, length of stay and cancellation terms.
RM and dynamic pricing
Nowadays, developments in technology and the Internet have made dynamic pricing both
possible and commercially feasible (Elmaghraby and Keskinocak 2003; Abrate, Fraquelli and
Viglia 2012; Mauri 2012). Dynamic pricing has been seen as a new version of price discrimination
(Krugmann 2000) where technology permits the continual adjustment of prices in line with
customer demand and their willingness and ability to pay. In line with this customers, 'frequently
pay different prices even when they have one and the same booking details depending on the
moment of the reservation' (Ivanov and Zhechev 2012: 182). Such frequent changes in prices
pose a number of challenges for marketers. Service companies that use a relatively simple range
of fi xed prices can establish a consistent price positioning in the minds of customers. In service
industries such as tourism where prior evaluation of quality is diffi cult, price can be the most
important indicator of expected service quality (Chen
et al
. 1994; Palmer and McMahon-Beattie
2008; McMahon-Beattie 2009). However, RM practices can have the apparently perverse effect
of reversing the link between service quality and price. At times of peak demand, congestion
(such as longer queues to check-in at a hotel or airport) results in lower perceived quality, yet
customers are charged more than in off-peak periods when quality of service may be higher.
It follows, therefore, that if price changes frequently, consumers may have greater diffi culty in
assessing the likely quality of a service. Additionally, research has examined how the lack of
openness in modern IT based dynamic pricing systems may create conditions of mistrust
(McMahon-Beattie 2009) where consumers are unsure as to how and why the price has been
set. The following section will examine this in further detail.
Ethical issues: fairness and trust
Given the above, McMahon-Beattie, Palmer and Yeoman (2011) have noted that a number of
studies have considered customers' perceptions of fairness within RM (Kimes and Wirtz
2003a, 2003b; Choi and Mattila 2003, 2005, 2006; Hwang and Wen 2009; Heo and Lee 2011).
Perceptions of unfairness, it is argued, might lead to loss of customer satisfaction and goodwill
and ultimately to loss of business. According to Kimes and Wirtz (2003b), customers may view
the price discrimination and demand based pricing as unfair for several reasons. They suggest that
if customers consider peak-demand prices as higher than their normal reference price, or see
regular prices as higher than their reference price due to benefi ting from frequent low-demand
prices, then they may perceive the prices charged as unfair. Understandably customers may feel
that companies are not providing more 'value' for higher priced offerings at peak-demand times.
