/C^^c^!P* /^' HD28 .M414 WORKING PAPER ALFRED SLOAN SCHOOL OF MANAGEMENT P. COMPETITION AND PRICE DISPERSION IN THE U.S. AIRLINE INDUSTRY by Severin Borenstein and Nancy L. Rose Latest Revision: June 1991 WP#3322-91-EFA MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASSACHUSETTS 02139 COMPETITION AND PRICE DISPERSION IN THE U.S. AIRLINE INDUSTRY by Severin Borenstein and Nancy L. Rose Latest Revision: June 1991 WP#3322-91-EFA MAR 3 1992! Competition and Price Dispersion in the U.S. Airline Industry by Severin Borenstein* and Nancy L. Rose** Revised June 1991 Abstract: We study dispersion in the prices that an airline charges to different customers on the same route. Such variation in airline fares is substantial: on average the expected absolute difference in fares between two of an airline's passengers on a route is thirty-six percent of the airline's average ticket price on the route. The pattern of price disperison that we find does not seem to be explained solely by cost differences. Dispersion is higher on more competitive routes, possibly reflecting a pattern of discrimination against customers who are less willing to switch to alternative flights or airlines. We argue that the data support an explanation based on theories of price discrimination in monopolistically competitive markets. * Department of Economics, University of California at Davis, Davis, CA 95616, 916-752-3033. **M.I.T. Sloan School ofManagement, 50 Memorial Drive, Room E52-434, Cambridge, MA 02139, and NBER, 617-253-8956. This paper grew out ofdiscussions ofairline pricing behaviorwith Peter Reiss. It has been improved by the comments and suggestions of Colin Cameron, Rob Feenstra, Jerry Hausman, Michael Katz, Jeffrey MacKie-Mason, James Poterba, Eric Rasmussen, Mark Roberts, Andrei Shleifer, Pablo Spiller, George Stigler, Lawrence Summers, and seminar participants at the Univeristy ofChicago, University of Dlinois, Universities of California at Berkeley and Davis, and the National Bureau of Economic Research. Marilyn Hoppe and Peter Otradovec of America West Airlines provided important doses of reality. We thank Lindsey Klecan, An-Jen Tai, and especially Janet Netz for excellent research assistance. Financial support from the National Science Foundation is gratefully acknowledged.