Product Line Competition: An Empirical Analysis of the Chinese Airline Industry

Abstract

Consumer heterogeneity drives airlines to compete with each other through product lines, in the form of different flights and different ticket policies (e.g., change fee) on the same flight. Using ticket level data from a major Chinese online provider of travel services, we explore airlines' choices of product lines, as well as the resulting prices and price dispersion. We introduce a flight-level competition measure and find it to be more effective than typical route-level competition measures such as $HHI$ in predicting airlines' product line and pricing decisions. We leverage our disaggregated data to measure a carrier's price dispersion at the flight, route, and day-level respectively. For each level, we also decompose the overall price dispersion into a within-group component and a between-group component respectively. Our results suggest that the effects of competition on price dispersion depend on the level it is measured at as well as the components. Ticket policies in our data are direct measures of quality, and we use this measure to study quality provision and quality dispersion.

Keywords: Product line competition; Ticket quality; Price discrimination; Chinese airlines

JEL Classification: D43; L13; L93.