The Effects of Competition on Price Dispersion in the Airline Industry: A Panel Analysis

47 Pages Posted: 11 Sep 2007

See all articles by Kristopher Gerardi

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Adam Hale Shapiro

Federal Reserve Bank of San Francisco

Date Written: July 2007

Abstract

This paper analyzes the effects of market structure on price dispersion in the airline industry, using panel data from 1993 through 2006. The results found in this paper contrast with those of Borenstein and Rose (1994), who found that price dispersion increases with competition. We find that competition has a negative effect on price dispersion, in line with the textbook treatment of price discrimination. Specifically, the effects of competition on price dispersion are most significant on routes that we identify as having consumers characterized by relatively heterogeneous elasticities of demand. On routes with a more homogenous customer base, the effects of competition on price discrimination are largely insignificant. We conclude from these results that competition acts to erode the ability of a carrier to price discriminate, resulting in reduced overall price dispersion.

JEL Classification: D43, L13, L93

Suggested Citation

Gerardi, Kristopher S. and Shapiro, Adam Hale, The Effects of Competition on Price Dispersion in the Airline Industry: A Panel Analysis (July 2007). FRB of Boston Working Paper No. 07-7, Available at SSRN: https://ssrn.com/abstract=1013385 or http://dx.doi.org/10.2139/ssrn.1013385

Kristopher S. Gerardi (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Adam Hale Shapiro

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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