Thursday, December 20, 2012
Is the Effect of Competition on Price Dispersion Non-Monotonic? Evidence from the U.S. Airline Industry
Posted by D. Daniel Sokol
Mian Dai, Drexel University Qihong Liu, University of Oklahoma - Department of Economics and Konstantinos Serfes, Drexel University - Department of Economics & International Business ask 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.