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HOW DOES THE INTERNET INFLUENCE PRICE DISPERSION? EVIDENCE FROM THE AIRLINE INDUSTRY

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  • *This paper is a revised chapter from my dissertation at Northwestern University. I am grateful to Shane Greenstein, Rob Porter and especially Scott Stern for their guidance and support. I also thank Jim Dana, Maria Goltsman, Igal Hendel, Mara Lederman, Aviv Nevo, Greg Pavlov, Maria Ponomareva, Andrew Sweeting, Elie Tamer, the Editor and an anonymous referee for helpful conversations and comments. Financial support from the Center for Studies in Industrial Organization and the Transportation Center at Northwestern University is greatly appreciated.

Abstract

I estimate the Internet's effect on the level and dispersion of airline fares on a given route within and across firms. The results suggest that increases in Internet penetration reduce average price and lead to higher intrafirm price dispersion, while increases in Internet penetration do not affect interfirm price dispersion on a given route. Internet penetration affects average fares most in competitive markets. These results suggest that the Internet has significantly but subtlely influenced domestic airline competition. The effect of the Internet on prices and price dispersion is larger on direct flights.

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