Pricing Practices of Resellers in the Airline Industry: Posted Price vs. Name‐Your‐Own‐Price Models

I find that when a reseller with market power serves an airline company and only linear contracts are feasible, the airline prefers that the reseller utilizes the Name‐Your‐Own‐Price (NYOP) (a la Priceline) instead of the Posted Price (PP) (a la Hotwire) model. Essentially, the airline can better extract the surplus of the reseller if power over pricing is in the hands of numerous consumers, each bidding according to her preferences, instead of being concentrated in the hands of the reseller. Introducing two part tariff contracts or competition among resellers eliminates the distinction between the two pricing models. Either form of pricing generates the same outcome as vertical integration of the airline with the downstream market of resellers.