Intertemporal price dispersion : the role of competition

Abstract

This paper considers European airline markets to establish a causal effect of competition on pricing dynamics. It shows that intertemporal price dispersion is strongly reduced by competition because flights booked close to departure time are priced substantially lower when competition increases. This way competition mainly benefits late bookers. Low-cost carrier competition appears to have a strong and lasting negative effect on intertemporal price dispersion. The effect of competition by full-service carriers is moderate and seems to disappear in the long run. This study confirms the crucial importance of low-cost carrier competition for European aviation markets.