Carriers’ Price Dispersion in the U.S. Airline Industry

This paper explores price dispersion in the U.S. airline industry by highlighting individual carriers’ price discrimination strategies. Using heteroskedasticity-adjusted instrumental variable technique, we found that individual carriers play crucial roles in determining price dispersion, implying that the carriers’ price discrimination strategies may influence variation in airfares. Based on the estimated price dispersion and the estimated average price, we distinguished sources of price dispersion by categorizing individual carriers’ pricing strategies. 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. However, most of the carriers showed different types of pricing strategies under the same market conditions in 2000. Therefore, this paper supported evidence that the type of the pricing strategies is not equal across the U.S. air carriers