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Market heterogeneity and the relationship between competition and price dispersion: Evidence from the U.S. airline market

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  • Howell, Charles
  • Grifell-Tatjé, Emili

Abstract

Previous studies agree that competition influences price dispersion, however there is disagreement on the direction of the effect. To explain this contradiction in findings we include a measure not typically considered in competitive analysis, the level of market heterogeneity. We find that the response of price dispersion to changes in competition is conditioned by differentiation. When products in a market are homogenous, increasing competition reduces price dispersion, while in a market with heterogeneous products, the same increase in competition increases price dispersion. We include an output attribute index as a control for market heterogeneity and test our method on 73,981 observations of airfare data from 2002 through 2016. The implication of our findings for policymakers is that the traditional measures of market concentration do not determine the level of competition alone. Decisions on allowing or disallowing mergers should consider market heterogeneity, not just concentration. The results of this work contribute toward extending knowledge on the effect of competition on price dispersion and introduce a method of measuring market differentiation.

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  • Howell, Charles & Grifell-Tatjé, Emili, 2022. "Market heterogeneity and the relationship between competition and price dispersion: Evidence from the U.S. airline market," Transport Policy, Elsevier, vol. 125(C), pages 218-230.
    • Handle: RePEc:eee:trapol:v:125:y:2022:i:c:p:218-230
    DOI: 10.1016/j.tranpol.2022.06.001
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    More about this item

    Keywords

    Price discrimination; Product differentiation; Pricing; Airline industry; Output attribute index; Firm heterogeneity;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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