Competition and price dispersion in the airline markets

Abstract

We use two ticket-level data sets on one-way domestic flights for the US airlines to examine the potentially nonlinear relationship between price dispersion and three forms of competition: inter-firm, inter-flight and frequency competitions. The linear relationship is rejected at any conventional significance levels. In particular, there is an S-shaped relationship between market concentration and price dispersion. This can be a reason for the mixed results in the literature. Roughly speaking, the inter-flight and frequency competitions have opposite effects on price dispersion. Finally, in general, the size of aircraft has a positive effect on price. However, for very large aircraft, the relationship becomes negative.

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