How does COVID-19 affect intertemporal price dispersion? Evidence from the airline industry

This study provides empirical evidence documenting how COVID-19 affects intertemporal price dispersion in the U.S. domestic airline market. Applying fixed effect techniques to a unique panel of 43 million fares collected before and after the outbreak of the pandemic, we find that airlines discounted fares by an average of 57% in the first five months of the pandemic, and that prices intertemporally increased at a lower rate, particularly in the last week to departure. As a consequence, flight-level price dispersion decreased. These findings are consistent with the theoretical predictions arising from models of stochastic peak-load pricing (i.e., the drastic decline in the demand for business travel during the pandemic decreases the shadow cost of capacity, resulting in lower fares and lower increases in fares) and intertemporal price discrimination (i.e., the decline in the share of business travel resulted in airlines adjusting their intertemporal pricing strategy by decreasing the rate at which fares increased for late-booking passengers).