Price Dispersion in the U.S. Airline Industry

Abstract

This paper explores price dispersion in the U.S. airline industry by highlighting differential individual carriers' pricing strategies. Using instrumental variables (IV) estimation, the results show that individual carriers play crucial roles in determining price dispersion, implying that their price discrimination strategies may influence variation in airfares. Based on observed price dispersion and average price, we distinguished sources of price dispersion and found that the pricing strategies varied across U.S. air carriers. In 2005, for example, monopoly-type price discrimination was likely to result in price dispersion for Northwest, whereas competitive-type price discrimination was likely to lead to price dispersion for Delta.