Econometric panel study demonstrates that competition reduces price dispersion across airline routes, indicating that prior conflicting evidence stemmed from omitted-variable bias.
We analyze the effects of competition on price dispersion in the airline industry, using panel data from 1993:Q1 through 2006:Q3. Competition has a negative effect on price dispersion, in line with the textbook treatment of price discrimination. This effect is pronounced for routes with consumers characterized by relatively heterogeneous elasticities of demand. On routes with a homogeneous customer base, the effects of competition on price dispersion are smaller. Our results contrast with those of Borenstein and Rose, who found that price dispersion increases with competition. We reconcile the different results by showing that the cross-sectional estimator suffers from omitted-variable bias.
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Gerardi et al. (2009) studied this question.
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