Revisiting the Relationship between Competition and Price Discrimination: New Evidence from the Canadian Airline Industry∗

We study the relationship between competition and price dispersion in the airline industry. Building on early theoretical work on price discrimination under imperfect competition, we develop a simple model which shows that, if consumers differ in terms of both their underlying willingness-to-pay for a flight and their degree of brand loyalty, competition may increase fare dispersion between some types of travellers while decreasing it between others. Using a novel source of data on airfares that allows us to distinguish tickets sold to different types of travellers, we empirically estimate the impact of market structure on fare dispersion in the Canadian domestic airline industry. We find that competition decreases dispersion between high and low Discount Coach fares while increasing dispersion between Business/Full Coach and Discount Coach fares. Our analysis highlights the fact that the relationship between competition and price dispersion depends on the basis of customer segmentation in an industry. It also shows that conflicting findings from earlier work on competition and price discrimination in the airline industry can, in fact, operate