Online Travel Agencies Benefit Consumers and Are Not Going Away

Pauline Frommer, daughter of famous travel guide author Arthur and a well-known travel writer in her own right, recently published a provocative article that has been picked up by at least a few travel sites. Starting with comments made by Tony Tyler, CEO of the International Air Transport Association, she writes that hotels and airlines would like to eliminate Online Travel Agency (OTA) middlemen like Expedia and sell direct to customers. Hotels and airlines say this will to be better for consumers because the consumers can realize personalized benefits from the suppliers’ loyalty programs.

Frommer is correct that airlines and hotels are trying to capture sales that are currently made through OTAs but she’s over-dramatizing the story a bit. Despite the dreams of would-be oligopolistic travel product suppliers, the best performing OTAs are not likely to go away soon. Frommer herself correctly points that OTAs offer many desirable customers benefits, like package deals, that most individual suppliers do not.

Warning: Economic theory follows 🙂

Frommer doesn’t mention the fact the OTAs facilitate a more efficient market by making pricing information easily available and transparent to users. If consumers are forced to visit multiple sites to comparison shop, average end user prices would rise because many people will stop searching before they find the best price. Hotels and airlines would like this because they would be the ones who would profit from the economic rents, that is, the excess profits above production prices that producers can realize in an imperfect market. In the status quo market, OTAs take a percentage commission on top the price that would be available in a perfect market, but I reckon that consumers make out much better than they would with no OTAs at all. Because OTAs offer real value to consumers, well-run OTAs are not likely to disappear soon from fairly governed markets.

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