978-1337407588 Chapter 19 Solution Manual Part 4

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Chapter 19: Pricing Concepts

True/False

1. GDS evolved from YMS.

PTS: 1 OBJ: 19-4 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level I Knowledge

2. The GDS systems that Orbitz and other middlemen use is an extranet.

PTS: 1 OBJ: 19-6 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level I Knowledge

3. Critics say that Direct Connect will allow American Airlines to raise its prices whenever it

wants.

PTS: 1 OBJ: 19-1 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level I Knowledge

Multiple Choice

1. American Airlines risks disappointing consumers who perceive Expedia and other

middlemen as the go-to source for “great deals.” This is because consumers expect _____

when they buy tickets.

a. reasonable competition

a reasonable price

c. little sacrifice

satisfaction maximization

e. All of the above

Chapter 19: Pricing Concepts

PTS: 1 OBJ: 19-1 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II Comprehension

2. American Airline tickets are a commodity. If other agents can sell its tickets, then they

have _____ that American Airlines does not have.

a. status quo pricing

competition

c. a distribution

supply and demand

e. unit market share

PTS: 1 OBJ: 19-2 TOP: AACSB Reflective Thinking

KEY: CB&E Model Strategy MSC: BLOOMS Level II Comprehension

3. The in-house reservation Direct Connect is the latest example of __________, long used by

airlines.

a. eliminating competition

penetration pricing

c. a yield management system

a ticket shopping bot

e. selling for the brand

PTS: 1 OBJ: 19-4 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II

Chapter 19: Pricing Concepts

Comprehension

4. Expedia, Orbitz, Priceline, and travel agencies make their money off __________.

a. commissions paid by the airlines to sell their tickets

the profits they make by bulk ticket purchases from the airlines

c. sophisticated scalping software

fees the airlines pay to list tickets on a global distribution system (GDS)

e. fees the airlines pay after a ticket is sold on the middlemen’s global distribution

system (GDS)

PTS: 1 OBJ: 19-4 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II Comprehension

5. By removing itself from GDS-type retailers, American Airlines will maximize its ability

for all of the following except _____.

a. increasing ticket revenue

decreasing marginal cost

c. two-part pricing

comparison shopping

e. bundling with hotels, rental car agencies, and the like

PTS: 1 OBJ: 19-1, 19-6, 21-3 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II

Comprehension

6. By eliminating the number of online ticket shopping venues that sold its tickets, American

Airlines improves _____.

a. its status quo pricing

Chapter 19: Pricing Concepts

its buyer dependence—those traveling in and out of its hubs

c. its ability to absorb fuel costs

its economies of scale

e. All of the above

PTS: 1 OBJ: 21-1–21-5 TOP: AACSB Reflective Thinking

KEY: CB&E Model Strategy MSC: BLOOMS Level II Comprehension

Critical Thinking Case

Will a New Reservation System Translate to Higher Prices for Travelers?

American Airlines, one of the top three airlines in the United States and a major international

carrier via strategic alliances with leading carriers around the world, was founded in 1930 as

In an effort to reduce distribution costs, gain greater control over the marketing of its airline

tickets, and better meet customer expectations, American Airlines upgraded its reservation

system. In making the upgrade, the company expected third-party travel operators such as

Expedia, Orbitz, and Priceline to follow suit.

The Reservation System

Consumers want low fares while also having the ability to customize their itineraries. Plus, they

want to do this themselves and not have to go through a travel agent. Via an in-house reservation

system called Direct Connect, American Airlines will be able to present a variety of

Chapter 19: Pricing Concepts

Middlemen such as Expedia and Orbitz conduct business via a GDS and do not want to upgrade

their reservation systems to models such as Direct Connect. However, the Direct Connect

The Dispute

In December of 2010, American Airlines announced that it would no longer do business with

Orbitz. By making this move, Orbitz could no longer sell American Airlines tickets on its online

booking website. At the heart of the dispute was that American Airlines wanted Orbitz to use

Some say that the bottom line is that American Airlines wants travelers to buy directly from its

website, such as the process utilized by Southwest Airlines. From a pricing perspective, the

middlemen such as Orbitz and Expedia say that this will allow American Airlines to raise ticket

The chief financial officer at US Airways said that his company agreed in principle with what

American Airlines was doing, citing the importance of lower airline distribution costs. Yet, this

competitive airline recently entered into an agreement with Expedia in which US Airways

committed to offering all of the airline’s content on Expedia through the GDS model. It could be

that competitive rivals see this as an opportune time to appear more customer-friendly, in the

hopes of gaining customer affinity while American Airlines battles it out with the middleman.

Sources: American Airlines, http://www.aa.com; Doug Cameron, “American Airlines Wants

Expedia, Orbitz to Come Around,” Wall Street Journal, January 5, 2011,

Cluthe, “American Airlines Battles Expedia and Sabre over Reservations,” PCMag.com, January

18, 2011,

Chapter 19: Pricing Concepts

Daily Finance, February 1, 2011,

February 16, 2011; Hugo Martin, “American Airlines-Orbitz-Expedia Feud may affect Ticket

Prices,” Los Angeles Times, February 7, 2011,

“Expedia Dumps American Airlines Listings,” FoxBusiness, January 3, 2011,

Open-Ended Questions

1 Identify each channel member’s pricing objective.

American Airlines: Sales-oriented retailer (e.g., Expedia, Orbitz, Priceline); profit-oriented

The pricing objective for channel members appears to vary based on position in the

channel. American Airlines juggles pricing on a daily basis so as to maximize sales.

Ultimately, the goal is to have every aircraft take off with all seats filled. American Airlines

wants to gain the largest market share and, as such, increase customer loyalty. The

2 What is the American Airlines’ pricing strategy?

American Airlines appears to follow a penetration pricing strategy. The constant juggling

of prices to accommodate the filling of seats on an aircraft results in the company

competing on price to the mass market. While there is lower profit per unit on some seat

Chapter 19: Pricing Concepts

True/False

1. The idea that “it’s too good to be true” did not stop people from buying. Consumers will

always choose the lowest price.

PTS: 1 OBJ: 19-1 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level I Knowledge

2. Amazon.com did not want to set the public relations precedent set by Tony Hsieh.

PTS: 1 OBJ: 19-1, 19-2 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level I Knowledge

3. Retailers contribute to the “door-buster” and “entitlement” behavior of customers when

pricing mistakes are made.

PTS: 1 OBJ: 21-3 TOP: AACSB Ethics

KEY: CB&E Model Pricing MSC: BLOOMS Level I Knowledge

Multiple Choice

1. In many marketing textbooks, including this one, there is the principle that if a retailer sets

the price too low, it will frustrate sales based on __________. The write-off of $1.6 million

in merchandise proves otherwise, given the context.

a. customer satisfaction

consumer law

c. the price-is-right notion

perceived reasonable value

e. None of the above

Chapter 19: Pricing Concepts

PTS: 1 OBJ: 19-1 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II

Comprehension

2. If one were to pick an explanation from economics for why 6pm.com customers took

advantage of the programming error that priced every piece of merchandise at $49.95, it

was to __________.

a. avoid the sacrifice effect of price

experience the pleasure of “cheating back” a large corporation

c. see if the company would eat the loss

join a class action suit

e. All of the above

PTS: 1 OBJ: 19-1 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II

Comprehension

3. What would be the retailing principle that compelled Tony Hsieh to ship merchandise that

was grotesquely underpriced when he could have just cancelled the orders?

a. Every online sale is a legal sale, a contract between consumer and retailer.

It would maintain customer satisfaction.

c. It would have cost more to settle in court.

The dollar amount lost is only retail, not wholesale.

e. The loss would be made up in future sales.

Chapter 19: Pricing Concepts

PTS: 1 OBJ: 19-1 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II

Comprehension

4. What really pays for the losses absorbed by 6pm.com?

a. Amazon.com

Amazon shareholders

c. 6pm.com

6pm.com vendors

e. None of the above

PTS: 1 OBJ: 19-5 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II

Comprehension

5. By rewarding consumers who took advantage of the pricing mistake, what factor of human

behavior did Tony Hsieh encourage about the shopping experience at 6pm.com? What

made a mistake a promotion?

a. feelings of entitlement

the hedonistic effect

c. a sense of fair play

the allocative effect

e. All of the above

Chapter 19: Pricing Concepts

PTS: 1 OBJ: 19-6 TOP: AACSB Reflective Thinking

KEY: CB&E Model Pricing MSC: BLOOMS Level II

Comprehension

6. Choose the most plausible reason that marketing manager might rationalize giving away

$1.6 million in merchandise?

a. Ultimately, long-term profit goals had to be considered, not a short-term loss.

It is still the right thing to do and no point second guessing Tony Hsieh.

c. The company seeks only a satisfactory profit motive.

People need a break from the recession.

e. Consumers did not feel like they were paying a penalty.

PTS: 1 OBJ: 21-1 TOP: AACSB Reflective Thinking

KEY: CB&E Model Strategy MSC: BLOOMS Level II Comprehension