Does Competition Increase Price Dispersion? Recent Evidence from the Airline Industry During the Covid-19 Pandemic

COVID-19 has caused substantial disruptions to the airline industry. This paper analyzes the effects of competition variations related to the pandemic on price dispersion. The sample includes ticket information from the DB1B database between 2018Q1 and 2021Q4. The fixed-effect panel instrument variable (IV) estimation finds evidence of an increased price dispersion during COVID-19 and a positive relationship between competition and dispersion. These results are robust to alternative measures of dispersion and subsamples and may be driven by the altered consumer behavior and the competitive landscape within the industry. Furthermore, the subsample analyses reveal that, as the infection rate rises, the dispersion increases more on leisure routes than big-city routes, on routes with low-cost carriers (LCCs) than those with legacy carriers, and on routes connecting two Republican-led states than those linking Democrat-led states. My analysis adds to the literature by exploiting the impact of changes in market conditions (i.e., the COVID-19 recession) on price and price dispersion using the latest data