Tuesday, March 29, 2011

Online Travel Industry: Competing for a tightened travel budget

In Bloomberg Business Week’s top 50 winning stocks in June 17, 2010 edition, Priceline.com—a website that helps users gain discount rate on travel-related items, was ranked the first top-performer on the list. The news made me interested in exploring more on this week’s topic, and that is to compare Priceline, one of the spearhead runners with its direct discount travel site competitors and a peek at the online travel industry as a whole.

One of the biggest online-travel industry news in 2010 was that Google “proposed $700 million acquisition of airline ticketing software company ITA Software Inc”, which triggered waves of unrest among current players like Priceline and Expedia because Google’s entrance could easily crush all its competitors. Referring to this week’s reading “A Fresh Look at Industry and Market Analysis,” where Professor Slater and Professor Olson modified Porter’s five competitive forces’ model and proposed an augmented model for market analysis. In this model, the threat of new entry and substitutes are referred to as the “composite competitive rivalry force,” where rivalry started from “civilized to cutthroat.” As more and more competitors enter the industry, the profit margin is reduced to market equilibrium where no one can even make a profit. The authors gave the example of the aviation industry in the U.S. where competition turned to vicious price wars where every player fell prey to the prison’s dilemma and ended up losing money. In the dot-com business, the truth is that if without sustaining innovation and differentiating business model, the few moguls like Google could easily utilize all its resources and customer base to beat its competitors one-sidedly.

The online travel industry is faced with, in summary, challenges like hotels and airlines bending themselves to decrease their reliance on intermediaries like Priceline; other entrants who share “a homogeneous need” and customer base. Moreover, the economy has changed consumers’ behaviors to its root, which leads to increasing bargaining power from customers.  


A Fresh Look at Industry and Market Analysis, Stanley F. Slater, Eric M.Olson, Indiana University Kelly School of Business
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