Airline Pricing, Price Dispersion and Ticket Characteristics On and Off the Internet

This paper uses a unique individual transactions data set to investigate the effects of internet purchase on the prices paid for individual airline tickets. The analysis also investigates the effects of changes in the percentage of online transactions on both online and offline prices and on overall price dispersion. The analysis also uses these unique data to provide a more complete analysis of the factors affecting airline price levels and price dispersion, contributing more generally to our understanding of airline pricing. Our novel data set includes detailed transaction level data the includes ticket characteristics and restrictions, carrier, estimated flight level load factors, date of issue, departure date, other hedonic factors affecting prices, whether the ticket was purchased online or offline, and the share of online purchases for the citypair. Controlling for numerous observed ticket characteristics, as well as carrier and route effects, the results show that online prices average about 13 percent less than the offline prices. The analysis also shows that a ten percent increase in the online share of tickets sold on a route decreases average prices by an additional 5 percent, with more of this effect coming in the form of lower offline prices. The results also suggest that the potential savings to the consumers from buying online in markets with lower share of internet purchases are higher than in markets where the online share is larger. The paper also finds evidence that an increase in online shares decrease price dispersion. The paper also uses these unique data to investigate the effects of hub dominance and high route shares on pricing. Due to data limitations previous investigations of these issues could not control for important ticket characteristics, load factors, and time of purchase in measuring the effects of concentration on price levels and dispersion. Our analysis controls for these factors while investigating the impact of market concentration on price levels and dispersion.