Is the Effect of Competition on Price Dispersion Nonmonotonic? Evidence from the U.S. Airline Industry

Dai, Mian; Liu, Weiqi; Serfes, Konstantinos

doi:10.1162/rest_a_00362

Cited by 91 publications

(39 citation statements)

References 12 publications

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“…Our findings indicate that, in our setting, competition has little impact on prices at the bottom or top of the distribution but a statistically and economically significant effect on prices in the middle of the distribution. Note that this result is different from that in Dai, Liu, and Serfes (2014). They also document a U-shaped pattern, but they measure the impact of increased competition on dispersion, starting from different levels of market concentration, while we focus on how a given change in competition impacts different parts of the fare distribution.…”

Section: Revisiting the Relationship Between Competition And Price DImentioning

confidence: 79%

“…Using data from the Irish airline industry,Gaggero and Piga (2011) find that competition reduces fare dispersion Hernandez and Wiggins (2014). find that competition from Southwest compresses the menu of fares Dai, Liu, and Serfes (2014). find a non-monotonic relationship between competition and fare dispersion, with competition increasing dispersion in concentrated markets but decreasing it in competitive markets.…”

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confidence: 99%

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Revisiting the Relationship between Competition and Price Discrimination

Chandra

Lederman

2018

American Economic Journal: Microeconomics

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dispersion. However, the subsequent literature has delivered conflicting findings. Most notably, Gerardi and Shapiro (2009) revisit the analysis in Borenstein and Rose (1994) and find precisely the opposite pattern. 1 Given this ambiguity, in this paper we revisit the relationship between market structure and price discrimination. We have three points of departure from the earlier literature. First, we build directly on early theoretical work on oligopoly price discrimination, which shows that competition can increase or decrease price differences. In particular, Borenstein (1985) and Holmes (1989) show that the effect of competition on price differences depends on whether discrimination is based on differences in consumers' underlying willingness-to-pay or differences in their degree of brand loyalty. We develop a simple model in which consumers differ along both dimensions and show that, with more than two types of consumers, competition may increase the price differential between some consumers while reducing it between others. Second, empirically, we estimate the impact of competition on price differentials rather than on overall price dispersion, which has been the focus of most previous studies. Since our theoretical model demonstrates that competition may increase price differences between some consumers while decreasing them between others, the impact on overall price dispersion is not necessarily informative about the changes in prices that take place. Finally, we exploit a novel source of data and study the Canadian airline industry rather than the US industry, which was the setting for many previous studies. There are a number of advantages to studying the Canadian setting. Most importantly, the small number of carriers operating in the domestic Canadian market means that the changes in market structure that we observe map much more closely to the simple comparison between monopoly and duopoly, which is the basis of our theoretical model and, indeed, much of the theoretical work in this area.Borenstein ( 1985) was the first to point out that while monopoly price discrimination is based on differences in consumers' underlying value of a good, oligopoly price discrimination can also be based on differences in the strength of consumers' brand preferences. Holmes (1989) then showed that a firm's price elasticity of demand in a market can be expressed as the sum of the industry-demand elasticity and the cross-price elasticity and that, with more than one firm, price discrimination can be based on differences in either elasticity. In his review article, Stole (2007) explicitly shows that with third-degree price discrimination, the relationship between competition and the price differential between consumer types will depend on whether consumers have similar or different cross-elasticities of demand. In particular, he shows that if all consumers have high cross-elasticities of demand, competition will push all prices toward marginal cost and reduce price differentials. On the other hand, if consumers with a ...

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Section: Revisiting the Relationship Between Competition And Price DImentioning

confidence: 79%

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confidence: 99%

Revisiting the Relationship between Competition and Price Discrimination

Chandra

Lederman

2018

American Economic Journal: Microeconomics

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“…Another set of explanations for price dispersion has to do with producer heterogeneity (Davis et al 2013) and market structure (Dai et al 2014). We do see that those have been important factors affecting mean PV prices (Gillingham et al 2016).…”

Section: Pv Installer and Market Structure Characteristicsmentioning

confidence: 80%

Characteristics of low-priced solar PV systems in the U.S.

et al. 2017

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Despite impressive declines in average prices, there is wide dispersion in the prices of U.S. solar photovoltaic (PV) systems; prices span more than a factor of four. What are the characteristics of the systems with low-prices? Using detailed characteristics of 42,611 small-scale (< 15 kW) PV systems installed in 15 U.S. states during 2013, we identify the most important factors that make a system likely to be low-priced (LP). Comparing LP and non-LP systems, we find statistically significant differences in nearly all characteristics for which we have data. Logit and probit model results robustly indicate that LP systems are associated with: markets with few active installers; experienced installers; customer ownership; large systems; retrofits; and thinfilm, low-efficiency, and Chinese modules. We also find significant differences across states, with LP systems much more likely to occur in some states, such as Arizona, New Jersey, and New Mexico, and less likely in others, such as California. Our focus on the left tail of the price distribution provides implications for policy that are distinct from recent studies of mean prices. While those studies find that PV subsidies increase mean prices, we find that subsidies also generate LP systems. PV subsidies appear to simultaneously shift and broaden the price distribution. Much of this broadening occurs in a particular location, northern California.

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“…To check for robustness, we re-estimate the MM-QR model by using an alternative measure of PMC namely the Hirschman-Herfindahl index of the 50 largest firms in the industry (HHI50). 2 The latter, is widely used in the literature as a proxy for competition (see for example Dai et al, 2014;Polemis and Tzeremes, 2019). We also apply the panel quantile regression estimator obtained by Canay (2011).…”

Section: Robustness Cheeksmentioning

confidence: 99%

A note on the estimation of competition-productivity nexus: a panel quantile approach

Polemis

2020

J. Ind. Bus. Econ.

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We study the impact of product market competition on productivity in 462 US manufacturing sectors for the period 1958-2009 through the lens of a panel quantile regression analysis. We confirm that there is a nonmonotonic inverse-U relationship between competition and total factor productivity. We argue that the turning point increases substantially as we move to the higher quantiles of the productivity distribution function. Our findings survive robustness checks under alternative competition measure and quantile estimator.

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Is the Effect of Competition on Price Dispersion Nonmonotonic? Evidence from the U.S. Airline Industry

Cited by 91 publications

References 12 publications

Revisiting the Relationship between Competition and Price Discrimination

Revisiting the Relationship between Competition and Price Discrimination

Characteristics of low-priced solar PV systems in the U.S.

A note on the estimation of competition-productivity nexus: a panel quantile approach

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