An empirical analysis of online price dispersion in the Italian airline industry

Abstract

Firms operating in the electronic marketplace set and adjust prices to affect demand and profitability. In service markets, such as airline markets, different prices are commonly offered by diverse firms to accommodate to a variety of market segments having particular sets of consumer attitudes. This variation in prices is the price dispersion and is based on market distinctiveness deriving from customer heterogeneity as well as the peculiar competition in the specific market arena. In this paper we use a panel dataset from the Italian airline market to investigate the role of competition and different online channels in the emergence of price dispersion. Specifically, we examine the unclear role of competition in price dispersion with novel data collected from different online channels, namely direct and Online Travel Agency (OTA) channels. We find that price dispersion is higher in routes where competition is higher even in presence of only one segment, namely the business segment. Our results also show that price dispersion significantly differs across different types of online channels.