Does Competition Decrease Price Dispersion? Recent Evidence from the Airline Industry During the Covid-19 Pandemic

Abstract

COVID-19 has caused substantial disruptions to the airline industry. This paper analyzes the impact of the pandemic on price dispersion. The sample includes ticket information from the DB1B database between 2018Q1 and 2021Q4. The fixed-effect panel instrument variable (IV) estimation finds evidence of decreased price dispersion during COVID-19. These results are robust to alternative measures of dispersion and subsamples. Furthermore, the subsample analyses reveal that, as the infection rate rises, the dispersion decreases more on routes with the presence of low-cost carriers (LCCs) than those exclusively served by legacy carriers, on routes connecting two Republican-led states than those linking two Democrat-led states, and on ultra short-haul routes (<500 km) than long-haul routes (>2500 km). My analysis adds to the literature by exploiting the impact of changes in market conditions (i.e., demand shocks triggered by the COVID-19 recession) on price and price dispersion using the latest data.

Keywords: Price Dispersion, Market Structure, Airline, COVID-19