Few decades ago, firms ruled supreme in getting the best profit margins out of their customers. It was an era of optimizing for the maximum possible profit. Market was very opaque because information was very expensive and untimely. Customers could not track price changes in real time. Even when they get the comparative prices, the distance to the other shop was a huge barrier. So in most cases, customers would knowingly pay high prices because of the need to save time.
This was the era when airlines maximized prices on tickets. When you leave your house to a travel agent, you have made up your mind to come back with a paper ticket. The travel agent was serving the airlines and the higher you pay, the better is his business.
Though he may offer some choices among the competing airlines, there was no major price pressure on him since at the end you would be forced to buy from him. Why? You may need to drive another twenty minutes for another travel agent. Under this model where you either buy from the airline offices or travel agents, your choices are very narrow and the airlines were in control.
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Then came the Internet era; from Priceline to Expedia, the customer for the first time had the power to make decisions based on price without even leaving the house. Go online; describe the trip and airline choices will roll down; usually, the cheapest one comes first. This market is a commodity business, especially for an average traveler. Who cares the airline you flew from Boston to Baltimore? Without that brand loyalty, the cheapest ticket always wins. The travel agents have lost the power to control the price. The airlines suddenly must compete on price resulting to lower profit margins.
There was price-war and it was very combative in the industry. Personally, I still think that the greatest competitor to airlines is the Internet. Without the Internet that destroyed the pricing model, they would still be doing much better compared to how they are doing today. At least, the Internet allowed the low-cost carriers to have direct access to customers. The Internet was the most important factor that enabled these low-cost carriers to get into the industry. It provided a platform through which they connected to customers directly and competed on price effectively.
As we celebrate the 25 years of .com, we will continue to see major transformations and disruptions arising from the Internet. Bookstores are going to become history in the next few years. The model of buying books and setting price for the local community is dead. The local community is no more ‘local’; they can buy from any part of the world. The local bookstore is competing with shops in China, India, Canada, etc because Amazon and ebay have provided platforms on the web that make such possible.
