Monday, April 17, 2017
Market Definition Changes the Story: Competition and Price Dispersion in the Airline Industry Revisited
Myongjin Kim, University of Oklahoma - Department of Economics and Leilei Shen, Kansas State University - Department of Economics explain Market Definition Changes the Story: Competition and Price Dispersion in the Airline Industry Revisited.
ABSTRACT: We analyze the effect of competition on price dispersion in the airline industry and show that the outcome hinges on redefining the extent of a market. Using panel data from 1993 to 2013, an increase in competition has a positive effect on price dispersion in one-way markets but a negative effect in round-trip markets. This is driven by a bigger (smaller) decrease in the 10th percentile of the price distribution in the one-way (round-trip) markets. We provide suggestive evidence that airlines compete more aggressively in the lower tail of the price distribution in one-way markets due to higher markups.