Airline firm boundary and ticket distribution in electronic markets

The electronic markets hypothesis (EMH) predicts that the intense intrusion of information technology (IT) into the market system has a strong influence on the degree of market coordination. As transaction costs go down due to inexpensive IT‐enabled exchange of information, market‐based economic activities increase. Contrary to the predictions of the EMH, US legacy airlines have increasingly relied on hierarchical governance and oppose market‐based economic activities. Using US legacy airline distribution strategies as an example, this paper demonstrates that even dominant players in an oligopolistic industry, operating during the explosive evolution of electronic markets, are subject to the predictions set by the EMH. Predictions of the EMH are tested by analyzing 17 years of operational data, using the DEA (data envelopment analysis) method. Tobit regression is executed in tandem with DEA to test the hypothesis that various strategies deployed by the legacy airlines have a strong impact on operational performance. Despite the perceived market power possessed by the strongest players, and the apparent inverse relationship between IT‐driven distribution and production within hierarchies, the end results reveal that legacy airline business strategies, such as disintermediation to exclude downstream players or vertical integration to compete with rivals, have created a negative impact on the business performance of airlines. Operational efficiency has not improved.