Online Appendix. Product Line Bundling: Why Airlines Bundle High-End While Hotels Bundle Low-End?

Transcription

1 Online Appendix Product Line Bundling: Why Airlines Bundle High-End While Hotels Bundle Low-End? STEVEN M SHUGAN University of Florida JIHWAN MOON University of Florida QIAONI SHI University of Florida NANDA S KUMAR University of Texas Dallas Appendix A. MGM Resorts International Appendix B. Delta Air Lines Appendix C. Park Place Car Wash Warrington College of Business Administration, University of Florida, Gainesville, FL SMS@ufl.edu Website: Phone: FAX:

2 Appendix A. MGM Resorts International This appendix shows that Las Vegas hotels exactly follow the bundling strategies predicted by our theory. MGM Resorts International (MGM) is one of the world s leading global hospitality companies, operating a peerless portfolio of hotels in Las Vegas, including ARIA, Bellagio, MGM Grand, Mandalay Bay, The Mirage, Monte Carlo, New York-New York, Luxor, Excalibur, Circus Circus, etc. These hotels charge different mandatory resort fees that include different amenities. Hence, the ancillary products included in the resort fees are, by definition, part of the core lodging service. For example, ARIA s $32 resort fees (per night) include in-room Internet access, fitness center access, and local phone calls. To explore the actual product-line and bundling strategies of MGM, we select four MGMowned hotels that well capture the diversity of qualities and locations in the MGM hotel line (see Figure 1): two high-end (ARIA and Bellagio), one intermediate (New York-New York) and one low-end (Circus Circus). For each hotel, Table 1 provides the review ratings, quality ratings, room rates, resort fees, and ancillary products included in the mandatory resort fees. Figure 1. MGM Hotel Locations in Las Vegas Blvd Circus Circus 17 min 20 min 36 min Mirage Bellagio ARIA Monte Carlo Las Vegas BLVD (The Strip) New York-New York MGM Grand

3 MGM Hotels ARIA $289 $32 Bellagio $299 $32 New York- New York Circus Circus Table 1. Product Line of MGM Resorts International: Hotels in Las Vegas Review AAA Room Resort Ancillary Products or Services Rating a Rating b Rate c Fee Bundled in Resort Fee 1. In-room Internet access 2. Fitness center access 3. Local phone calls 1. In-room Internet access 2. Fitness center access 3. Local phone calls 1. In-room and property-wide wireless Internet access 2. Fitness center access $194 $30 3. Airline boarding pass printing, faxing, copying 4. Daily newspaper 5. Local and 800 calls 6. 2 for 1 roller coaster passes 3.5 NA d $85 $21 1. In-room wireless high-speed Internet service 2. Two complimentary cups of in-room coffee 3. 2 for 1 roller coaster ticket at the Adventuredome 4. Free chips and salsa with $8 minimum purchase at Blue Iguana valid for one visit 5. Two free midway games 6. BOGO free drink at West Casino or Slots A Fun bar (or a $5 credit toward other beverage) 7. Fitness center access 8. Airline boarding pass printing 9. Local and 800 calls a: The second column reports the traveler reviews that TripAdvisor provides on May 2, b: The American Automobile Association (AAA) hires full-time inspectors to visit and evaluate each property. If AAA s inspectors don t feel a hotel meets AAA s strict standards for value and quality, the hotel doesn t receive a diamond rating. Properties are assigned a rating from one diamond to five diamonds. The AAA Diamond ratings represent a combination of overall quality, the range of facilities, physical attributes, and level of services offered. c: From Expedia, we find room rates for the stay from May 13, 2016 to May 15, This search occurred on May 2, d: This property has not been rated because management refused inspection on November 18, 2015 (see the AAA inspector note for more information, available at ARIA and Bellagio are the highest-end MGM hotels, each having excellent reviews, a superb location in the center of the Las Vegas Strip, and five AAA (American Automobile Association) Diamond ratings. With the highest room rates in the MGM product line, they also impose high nightly resort fees that only include basic benefits: in-room Internet access, fitness center access, and local phone calls. According to our definition of the core the bundle of all products and services that a seller always provides at a single price the Internet access and local phone calls are part of the core because other hotels also include these services (as part of their mandatory resort fee or basic room rate). Thus, ARIA and Bellagio de facto bundle only fitness center access, which is consistent with our predictions (i.e., given that MGM can differentiate its high-end hotels from its low-end hotels without any constraint, unbundling is optimal at these high-end hotels). Conversely, Circus Circus is a low-end MGM hotel that has poor reviews and the lowest room rates in the MGM product line. Circus Circus is in the worst location of any MGM resort (a 36 minute walk to Bellagio). Moreover, opened on October 18 in 1968, Circus Circus now becomes a

4 low-quality hotel with aging rooms and thin walls. When a hotel grows old and outdated, the hotel cannot easily improve the core lodging service (e.g., room condition, interior design, furnishing, security system, etc.) with cutting-edge technology. The outdating technology, physical aging, and poor location might cause a constraint on the low-end quality. Given this low-end differentiation constraint, consistent with our theory, Circus Circus, which charges the lowest resort fee, offers, interestingly, the most ancillary products for free (see Table 1). In addition, New York-New York, a MGM s intermediate hotel, charges a moderate resort fee and includes an intermediate number of ancillary products. This in-between strategy confirms our theory is valid for multiple products in the MGM s product line. Lastly, each hotel separately designs its ancillary products. For example, four hotels in Table 1 allow customers to access their fitness centers, which differ greatly in quality according to whether they are at the high-end or low-end. Usually, low-end (high-end) hotels bundle low-quality (highquality) fitness centers that match their core quality. Moreover, Circus Circus s BOGO free drink is only available at its casino and bar. These examples indicate that the MGM hotels, which adopt different bundling strategies, have ancillary products that differ in both quality and combination, (i.e., different decision process), consistent with our theoretical model. Appendix B. Delta Air Lines Delta Air Lines (Delta) is one of the major American airlines, currently operating a fleet of over 800 aircraft manufactured by Airbus, Boeing, and McDonnell Douglas including Airbus A330, Boeing 717, McDonnell Douglas MD-88, etc. Delta has an extensive product line including Delta One, First Class, Delta Comfort+, Main Cabin, and Basic Economy (see Table 2). Delta One (for international flights) and First Class (for domestic flights) are high-end seats. Delta One offers full flat bed. First Class offers big seats (18.5~20.75 inches 37~40 inches) and large leg rooms. These high-end seats provide many ancillary products and services, for example, beverages (e.g., beer, wine, and spirits) on all flights, first to board the aircraft, and meal services on flights over 900 miles (for domestic flights). The other seats include none of these services. Delta Comfort+ and Main Cabin are intermediate seats, providing seat selection at the time of purchase and flexible flight changes. In particular, Delta Comfort+ also provides free premium entertainment and ear plugs on flights over 250 miles like the high-end seats (i.e., Delta One and First Class). In contrast, the lowest-end Basic Economy bundles none of these ancillary products. It is difficult for Delta to differentiate the high-end because passengers travel in the same flight (i.e., constrained to the same location) will share common service features, for example, the same departure (arrival) time, diversions, turbulence, luggage handling, delays, etc. Given this high-end differentiation constraint, consistent with our theory, Delta bundles more ancillary products with higher-end seats to achieve an optimal line differentiation (see Table 2). Although many of the free ancillary products for higher-end seats are also available to lowerend seats for extra fees, there are some ancillary products that are exclusive to the high-end seats. For example, Delta One bundles chef-curated meals and Master Sommelier selected wine pairings, which are not even available to the low-end seats. This implies that for the high-end (Delta One), Delta separately designs high-quality (high-cost) ancillary products that match the high-end seats, which is consistent with our assumptions on the utility and cost functions.

5 Table 2. Product Line of Delta Air Lines Free Ancillary Products Delta One First Class Delta Comfort+ Main Cabin Basic Economy Seat selection at time of purchase Flexibility for flight changes Meal service on domestic flights > 900 miles Beer, wine, and spirits on all flight Beer, wine and spirits on flights > 250 miles A a A Premium snacks on domestic flights > 250 miles Pre-departure beverages, beer, wine, and spirits Chef-curated menus Master Sommelier selected wine pairings First to board the aircraft Westin Heavenly in-flight bedding Premium entertainment Pillow/blanket R b R R Earbuds on flights > 250 miles A A Noise-reduction headsets A A A A Access to power ports M c M S d S Access to Delta Sky Clubs A A A A Tumi amenity kit with Malin+Goetz skincare product a: The ancillary product that is available for purchase. b: The ancillary product that is upon request, where available. c: The ancillary product available on most flights. d: The ancillary product available on selected flights. Appendix C. Park Place Car Wash Park Place Car Wash (Park Place) is a local auto wash service provider in Gainesville, FL, which provides three different (core) services: Self Service, Full Service (Washes), and Detail Packages. The low-end Self Service allows customers to drive through car wash machines by themselves. For the intermediate Full Service, Park Place employees wash cars. The high-end Detail Packages

6 includes washing the exterior of a vehicle, restoring the original condition of the car surface, and cleaning the whole interior cabin. For each core service, Park Place offers varied bundles. Self Service is either Feather Touch or Touch Free. Feather Touch soaps, washes, and rinses cars by car wash machines equipped with feathers while Touch Free does the same tasks with high-pressure water sprays. Whether Feather Touch or Touch Free, Self Service has three options (The Patriot, Blue Wash, and White Wash) that bundle different car wash products. The Patriot (the most expensive self-service) includes all available products: soaps, conditioners, rinses, waxes, and Rain X (a surface care product) while White Wash (a less expensive self-service) only includes soaps, rinses, and waxes (see Table 3). Lastly, Park Place extends the Feather Touch line by adding Red Express (the least expensive selfservice) for those who only need fast and basic services. Table 3. Park Place: Self Service The Patriot Blue Wash White Wash Red Express b $12.00 a $10.00 $8.00 $6.00 Core Soap and wash Double Rinse Under carriage wash Power dry Ancillary Wax Tri-foam Tri-foam Sealer Wheel scrub Rain X a: This table reports the prices that Park Place charges on May 2, b: Red Express is only available for Feather Touch. Self Service uses car wash machines with almost same functions, making it difficult for Park Place to differentiate the high-end self-service though The Patriot offers double soups and washes. Hence, to achieve an optimal line differentiation for the Self Service category, consistent with our theory, Park Place bundles more ancillary products (e.g., conditioners and Rain X) with higherend services (e.g., The Patriot). Similarly, for each of Full Service and Detail Packages, Park Place provides various options. The Full Service line includes The Works, Superior Wash, Supreme Wash, Super Wash, and Basic Wash (see Table 4). The Detail Packages line includes Showroom Extreme, Bumper to Bumper, Complete Exterior, Complete Interior, and Hand Wax (see Table 5). Given standardized relatedtechnology, it might be hard to differentiate the services within the manned car wash and detailing. Hence, Park Place adds more ancillary services to the higher-ends of each line (e.g., bug removal for the full-service car wash and trunk shampoo for detailing), consistent with our theory.

7 Table 4. Park Place: Full Service The Works Superior Supreme Super Wash Basic Wash Wash Wash $34.99 a $29.99 $23.99 $18.99 $15.99 Core Soft cloth wash Hand dry Interior vacuumed Dash dusted Windows cleaned Fragrance Dry door jambs Underbody flush Ancillary Wheels cleaned Wax Tri-foam Tri-foam Tri-foam Sealer Tire shine Rust inhibitor Rain X complete Dash & console cleaned Bug removal a: This table reports the prices that Park Place charges on May 2, Core Ancillary Table 5. Park Place: Detail Packages Showroom Bumper to Complete Complete Hand Wax Extreme Bumper Exterior Interior $ a $ $ $ $75.00 Full service car wash Chrome polished Exterior trim (paint) Vinyl Carnauba wax Tire treatment Leather seats and panels Shampoo upholstery Shampoo carpets and mats Fabric protector Remove surface contaminants Trunk shampoo $10 OZONE (for bad odors) $15 $20 a: This table reports the prices that Park Place charges on May 2, 2016.

8 Within each core service (i.e., Self Service, Full Service, and Detail Packages), Park Place has similar technology, making it difficult to differentiate the high-end (i.e., a high-end differentiation constraint). In this case, our theory predicts that high-end bundling is optimal within the product line of each core service, consistent with the actual product-line bundling strategy of Park Place. Moreover, within Full Service, (high-end) The Works uses premier tri-foam wax while (lowerend) Super Wash uses lower-quality sealer wax. Within Detail Packages, Park Place bundles highquality fabric protector at high ends (i.e., Showroom Extreme and Bumper to Bumper) that is not even available to low ends. These examples imply that Park Place separately designs high-quality (high-cost) ancillary products that match their high-end services, consistent with our utility and cost assumptions.

9 Core Car Wash Table 6. Product Line of Park Place Car Wash Detail Packages Full Service Self Service Showroom Extreme The works The Patriot $ a $34.99 $12.00 Soft cloth wash Soft Cloth Soft Cloth Feather Dry Hand Hand Underbody flush Interior vacuumed Dash dusted Windows cleaned Fragrance Dry door jambs Detailing Chrome polished Exterior trim (paint) Carnauba wax Tire treatment Leather seats and panels Shampoo upholstery Shampoo carpets and mats Ancillary Services Wheels cleaned Tri-foam wax Rain X Complete Complete Tire shine Rust inhibitor Dash & console cleaned Bug removal Remove surface contaminants Fabric protector Trunk shampoo OZONE (for bad odors) $15 a: This table reports the prices that Park Place charges on May 2, 2016.

10 We have checked that our theory is consistent with Park Place s product-line bundling strategy within each core service. Now to check the consistency of our theory across the core services, we first consider two core car wash services: Full Service and Self Service. To compare the bundling strategy for Full Service and Self Service, we choose their highest-ends (i.e., The Works and The Patriot, respectively) because their lowest-ends do not include any ancillary services, i.e., nothing to compare. Given that the two core services share the common product feature (i.e., car wash), Park Place suffers a high-end differentiation constraint. Hence, consistent with our theory, (highend) The Works includes more (high-quality) ancillary services, e.g., tire shining, rust inhibiting, and bug removing. In contrast, (low-end) The Patriot only includes three (low-quality) ancillary services: wheel scrub, tri-foam wax, and Rain X (not a complete set of Rain X products). See Table 6. Finally, to compare the bundling strategy for Full Service and Detail Packages, similarly, we consider their highest-ends: The Works and Showroom Extreme, respectively. Detailing always includes full-service car wash, i.e., the two core services share the common technology, causing a high-end differentiation constraint. Hence, to achieve an optimal line differentiation across the two different core services, as our theory predicts, Park Place bundles more (high-quality) ancillary services with (high-end) Showroom Extreme compared to (low-end) The Works including surface contaminant removal, fabric protector, and trunk shampoo. See Table 6.