Competition and Price Dispersion in the U.S. Airline Industry:

We re-examine the relationship between competition and price dispersion in the airline industry. Quality competition models in the literature so far have restricted their attention to coach class passenger data, thereby not explicitly modelling quality differentiation in their empirical applications. We tackle the mismatch between theory and application by introducing quality dispersion in our analysis with the use of a sample that includes both coach class and business class passengers. In addition to introducing quality differentiation, we evaluate the consistency of our results across specifications in which competition is measured by airline market shares based on passenger tickets sold, passenger enplanement and flight departure data. Using a rich panel of airline ticket and competition data from 1993 to 2014, we find robust evidence for a nonmonotonic relationship between competition and price dispersion. Additionally, we provide preliminary evidence that the strength of the non-monotonic relationship is influenced by the concentration of monopoly routes in the data.