The reading by Allyn Young focuses on two aspects of division of labour: growth of indirect or roundabout methods of production and division of labour among industries (as opposed to within a firm or industry). The author also points out that the size of the market (capacity to absorb output of goods) remains the single most important factor in determining an industry’s competitiveness, but this, in turn, is determined by the volume of production in the industry. The reading further highlights that division of labour among industries can be a source of increasing returns and thus actively promotes the idea of intermediation as a way of increasing returns.
Case Overview:
The case gives insight into the growth of Priceline.com and highlights its effectiveness as an intermediary, focusing on the unique model created by it where the customer can seek to be served at a particular price, and not be dependent on the published rates(fares) of the service providers (here airlines, hotels etc). The case highlights how strategic division of labour (in the context of this case – intermediation) can actually benefit both the producer and the customer, and create more value by tapping new markets / expanding the existing market.
By allowing customers to bid a price for air tickets, Priceline essentially tapped a new market for those customers who were willing to forego convenience and brand image in favour of price (eg. budget minded leisure travellers). At the same time it allowed the airlines to effectively sell out those tickets which would otherwise remain empty, without diluting their brand or foregoing the business customers.
1. Allies: Priceline actively pursued an alliance with the major airlines and hotels, including a stake sale to the airlines to rope them into the program. Thus it ensured greater inclination on the airlines’ behalf to provide incentives to its customers. It also collaborated with its indirect competitors such as Travelocity and Cheaptickets, to ensure a potential win-win alliance for all of them. Finally, by providing customers to actively participate in the sale of goods (read tickets etc), it also was able to forge an alliance with them, which led to a substantial increase in its sales, in the second year itself.
2. Sources of Profit: Following can be identified as the (potential) source of profits for PriceLine:
a. Substantial customer base giving it more bargaining power with airlines, hotles etc
b. Brand image, consciously cultivated through advertising spends
c. Building economies of scale and then capitalizing on it through diversification (expanding value chain)
d. Potentially untapped market, Blue Ocean Strategy
3. Why is it diversifying: Priceline is primarily targeting the value oriented customers, who will be willing to forego certain other parameters of service for a better price. Also, in some ways, its key customer is the leisure traveler. Thus,
a. diversification into car rentals, hotels and travel packages gives it a chance to capture an increasing share of the customer’s wallet
b. diversification into home financing, groceries, long distance telephone calls etc gives it a chance to capture other segments with similar buyer characteristics viz. price sensitivity and flexibility requirement
c. encashing upon its brand image and customer base
Based on Young’s article, we can understand the importance of Priceline as an intermediary and a market maker. Priceline plays a key role in establishing a link between price sensitive but otherwise flexible customers and airlines (and other segments too). Thus, in the airline segment for example, it helps convert a latent demand for seats at a lower price into actual demand thereby increasing the market (capacity to absorb the product) and at the same time builds a market for the vacant airline seats (volume production). Further, it helps the airline industry achieve increasing returns through this intermediation (division of labour).
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