The Value to Consumers of IT-Supported a la Carte Pricing: An Empirical Test of the Strategic Decommoditization Hypothesis

We evaluate the theory of strategic decommoditization. The theory suggests that firms can strategically utilize Internet technologies to "decommoditize" the products that are being sold. This prompts the consumer to make a purchase decision that is less focused on price. This is an important new direction in the use of Internet technology to sell perishable products, which are subject to revenue yield management and for which numerous variations of a basic bundled offer are possible. We use data from a large international airline firm that offers tickets and tie-in services via its online portal. The latter includes frequent flyer mileage accrual, seat assignment, and itinerary change, among others. The airline offers a set of standard branded product bundles that can be modified by adding or removing services. This design is commonly referred to as an a la carte offering. We examine sales under this a la carte pricing mechanism and compare it to sales via channels that sell tickets in the more traditional manner, where bundled offers are less transparent and cannot be modified. We develop hypotheses about the value that consumers place on the a la carte channel and on the consequent differences in booking patterns across channels. We find that roughly one of six standard bundles is customized in the a la carte channel, and these customizations occur mainly for the low-feature standard bundles. We also find that the airline\´s frequent flyer members and business travelers purchase high-feature bundles more often in the a la carte channel than in the traditional channel. These findings support the theory of strategic decommoditization in the air travel context.