Opaque Selling University of Victoria Opaque Selling in the Hospitality Industry: Hotwire’s Hot Rates 1 According to Wikipedia, opaque selling is the practice of selling distressed travel inventory, such as hotel rooms, airline tickets, or car rental, at discounted prices while hiding key characteristics of the good. Consumers do not know the specific supplier until after the purchase has been completed. The purchase is non‐refundable, non‐changeable and non‐transferable. The two main models of opaque selling are Priceline’s ‘name your own price’® and Hotwire’s ‘hot rates’. The distinction is that Hotwire has posted prices while Prieline’s consumers make bids and Priceline decides whether to accept or reject within 15 minutes. Figure 1 shows that the opaque section on Hotwire displays partial information on hot rate hotel offers, such as the general area in a city, the star level and some amenities. It does not reveal the hotel’s exact location and name. The prices of opaque offers are much lower than the prices of regular offer; up to 50% discount rate according to Hotwire. Hotwire lists some hotel suppliers on its website but claims that “Hotel brands are provided as examples only; Hotwire does not guarantee you will stay in one of the hotels listed above.” Opaque selling is offered by online travel agency (OTA). OTA is a growing distribution segment for the hospitality industry. The North American OTA market is highly concentrated, as four companies, along with their subsidiaries, collectively hold more than 97% market share: Expedia (expedia.com, hotwire.com), Sabre Holdings (Travelocity.com, Lastminute.com), Orbitz Worldwide (orbitz.com, cheaptickets.com) and Priceline. OTAs offer hotel rooms around the world, airline tickets, car rental, and travel packages that include 2 or three of these items. OTAs have successfully developed opaque selling in North America and also worldwide. Hotwire, for example, has opaque offers for a wide range of cities, areas, star levels and days including peak seasons such as the Christmas holidays. TravelClick reports that the opaque segment represents 6% of hotel reservations for major hotel brands. Non‐opaque OTA reservations represent 13%, and Internet reservations 53%, of all reservations (Table 1). OTAs typically work under a merchant model. An OTA receives a commission once a booking is made but it makes no commitment on inventory and takes no risk. OTAs charge substantial fees for their services. According to the HSMAI foundation, OTA commissions in 2011 were approximately 17% for regular hotel rooms, 25% for travel packages and 40% for opaque This case is written by Wenyu Liu under the supervision of Pascal Courty at the University of Victoria. It is intended only to help teaching and facilitating class discussions. Copyright © 2012.