Is the Effect of Competition on Price Dispersion Non-Monotonic? Evidence from the U.S. Airline Industry

Abstract

We investigate the effect of competition on price dispersion in the airline industry. Using panel data from 1993 to 2008, we find a non-monotonic effect of competition on price dispersion. An increase in competition is associated with greater price dispersion in concentrated markets but is associated with less price dispersion in competitive markets (i.e. an inverse-U relationship). Our empirical findings are consistent with an oligopolistic second-degree price discrimination model and encompass contradictory findings in the literature.

Keywords: Price Dispersion, Second-Degree Price Discrimination, Airline Industry

JEL Classification: D43, L11, L93