Market Definition Changes the Story: Competition and Price Dispersion in the Airline Industry Revisited

43 Pages Posted: 1 Mar 2017  

Myongjin Kim

University of Oklahoma - Department of Economics

Leilei Shen

Kansas State University - Department of Economics

Date Written: February 27, 2017

Abstract

We analyze the effect of competition on price dispersion in the airline industry and show that the outcome hinges on redefining the extent of a market. Using panel data from 1993 to 2013, an increase in competition has a positive effect on price dispersion in one-way markets but a negative effect in round-trip markets. This is driven by a bigger (smaller) decrease in the 10th percentile of the price distribution in the one-way (round-trip) markets. We provide suggestive evidence that airlines compete more aggressively in the lower tail of the price distribution in one-way markets due to higher markups.

Keywords: Price Dispersion, Competition, Market Definition, Airline Industry

JEL Classification: D43, L13, L93

Suggested Citation

Kim, Myongjin and Shen, Leilei, Market Definition Changes the Story: Competition and Price Dispersion in the Airline Industry Revisited (February 27, 2017). Available at SSRN: https://ssrn.com/abstract=2924786 or http://dx.doi.org/10.2139/ssrn.2924786

Myongjin Kim

University of Oklahoma - Department of Economics ( email )

308 Cate Center Drive
Norman, OK 73019-2103
United States

Leilei Shen (Contact Author)

Kansas State University - Department of Economics ( email )

Manhattan, KS 66506-4001
United States

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