Journal of Air Transport Management 26 (2013) 31e34

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Journal of Air Transport Management

journal homepage: www.elsevier.com/locate/jairtraman

Price dispersion and competition in European airline markets

Andy Obermeyer*, Christos Evangelinos, Ronny Pschel
Institute for Transport and Economics, Friedrich List Faculty of Transportation and Trafc Sciences, Dresden University of Technology, Chemnitzer Strae 48, Dresden, Germany

a b s t r a c t
Keywords:
Price dispersion
Price discrimination
Price differentiation
Competition
European airline markets

This paper tests the effects of competition on price dispersion in European airline markets. By conducting
a cross-sectional analysis of some 1200 ights between more than 130 European airport pairs, we
conrm recent results for the US airline industry that show a non-monotonic relationship between
competition intensity and price dispersion. We link our results to recent efciency and productivity
analyses. Our ndings support the hypothesis that efcient airlines are better positioned to differentiate
fares than their less efcient counterparts.
2012 Elsevier Ltd. All rights reserved.

1. Introduction
Price dispersion refers to variation in prices for the same service
or product, such as an economy-class ight from point A to B. The
sources of price dispersion are numerous; in the case of air transport,
price discrimination and peak-load pricing are typically cited as key
determinants of dispersion. Here we examine variation in airline
fares over the booking period for a specic ight, i.e. we consider
intertemporal price dispersion. In this setting, price dispersion arises
from differential pricing, with airlines deliberately modulating prices
based on passenger willingness to pay.
We are particularly interested in examining how price dispersion is inuenced by the competitive environment in which airlines
operate. Previous studies in this area have taken into account
monopoly and brand effects, although Dai et al. (2011) extends this
by introducing incentive compatibility. Several studies have
revealed a positive relationship between competition intensity and
price dispersion that is consistent with the brand effect, but others
show a negative relationship explained in terms of a monopoly
power effect. Dai et al. nd a non-monotonic relationship resulting
from a simultaneous direct price effect and an indirect quality
effect. Price dispersion is found to increase or decrease in tandem
with market concentration depending on which effect is dominant.
Both effects are related to the incentive compatibility constraints in
second-degree price discrimination models that entail product
differentiation.
Most studies have also focus on the US airline sector. Due to
limited data availability only a few studies have been carried out for
Europe, and they are often limited to specic airports or geographic
regions.
* Corresponding author.
E-mail address: andy.obermeyer@tu-dresden.de (A. Obermeyer).
0969-6997/$ e see front matter 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.jairtraman.2012.08.014

From a theoretical perspective it is ambiguous which foundations underlie economic research on price dispersion. On the
one hand, the classical approach follows the Structure-ConductPerformance paradigm. Given that the market structure and,
hence, the degree of competition varies within airline submarkets, rms may have various options for differentiating their
prices. On the other hand, however, price discrimination may
also be the result of efciency. When comparing two identical
ights operated by two airlines, the airline that is more cost
effective should theoretically have a greater ability to differentiate its air fares. The application of this insight to price
dispersion could lead to totally new conclusions. However, to
our knowledge there is no previous research that links price
discrimination to airline efciency.

2. Data
To investigate the inuence of competition on price dispersion,
the rst step is to gather data on prices and ight frequencies. Using
the travel meta search engine Kayak (www.kayak.de) we collected
ticket price information on routes between the airports of European capitals and other international airports with more than one
million departing passengers travelling within Europe in 2008. We
recorded air fares starting six weeks prior to the departure date,1
generating a database of 1210 economy-class ights operated by
40 airlines for 137 airport pairs (following deletion of incomplete
data sets).
Price dispersion for each ight is calculated based on commonly
used indices such as the Gini coefcient G:
1
Departure date was set to 9 July 2010. Price data was collected 42, 35, 28, 21, 14,
13, 12, 11, 10, 9, 8, 7, 6, 5, 4, 3 and 2 days prior departure.

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A. Obermeyer et al. / Journal of Air Transport Management 26 (2013) 31e34

n X
n 

1 X


pi  pj ;
2
2n p i 1 j 1

(1)

m3 Touristr m4 Distancer m5 Populationr

where n denotes the number of observed prices, p the average

ticket price and p1,.,pn the n ticket prices observed for a particular
ight.2
As an alternative, the Theil index T and the Atkinson index A3
(3 0.5) are also calculated:

 
n
1X
pi
p
ln i
n i1 p
p
"

A3 1 

(2)

#
n  13 1=13
1X
pi
n i1 p

with 3 s1:

(3)

The use of various dispersion measures reduces the risk of

drawing conclusions that are distorted because of the application of
a single index. Accordingly, we use these three price dispersion
measures as dependent variables in our regressions.
To measure competition intensity we use the Herndahle
Hirschman Index HHI, where a value close to 1 indicates high
market concentration and, consequently, a low degree of competition in the market. We calculate this index based on the number of
ights for a specic route:

HHI

k
X
i1

Frequencyi

Pk

j1

Frequencyj

!2

(4)

Frequencyi denotes the number of ights carried out by airline i

on a specic route, where k is the number of all airlines operating
on this route. The number of ights on a specic route carried out
by each operating airline was determined for an interval of three
months based on published ight plans. HHI is 0.595 on average,
with a standard deviation of 0.208. Alternatively, competition
intensity could have been calculated based on passenger ows.
However, we decided against this approach due to a lack of reliable
data. Furthermore, even if good data were available, the use of
passenger ows is problematic because this gure is partially
determined by price. By using the number of ights as a measure
the problem of endogeneity can thus be reduced.
Additional information is required to control for other inuences on price dispersion. We introduce dummy variables for
departure time and airlines as well as several route characteristics
using sources like ESPON (2007) for the number of inhabitants in
a metropolitan area and the Eurostat database (avia_paoa) for the
number of departing passengers by airport.
3. Model
Our regression analysis is based on cross-sectional data. The
dependent variable is the measure of price dispersion implemented in each case (G, T, A3 ). The degree of competition is
represented by the market concentration variable HHI. As
depicted in the second-order polynomial of the Equation (5), the
model allows for a exible relationship between both price
dispersion and market concentration.3 This specication is based
on the theoretical considerations of Dai et al. (2011), who predict
an inverse U-shaped relation between competition and price
dispersion. The estimation Equation:

The sample mean of G is 0.095 with a standard deviation of 0.076.

We use the direct way to test nonlinearities rather than Taylor approximation
(translog), which would entail additional modelling (Box-Cox transformations) and
interpretation difculties.
3

PDMfar b0 a1 HHI2r a2 HHIr m1 Flightsr m2 LCCr

m6 Passengersr g1 Morningfar g2 Middayfar
g3 Afternoonfar

m
X

da Airlinefar 3far

(5)

a2

where f indicates a specic ight operated by airline a on route r.

The number of airlines in the dataset is m; 3 represents the error
term. Other variables are route characteristics (indicated by the
parameters m), departure time dummies (g) and airline dummies
(d). These variables are briey described in the following:
 Flightsr is a variable that measures the number of ights on
route r during a xed time interval. It is the capacity offered by
all airlines operating on this route.
 LCCr is a dummy variable indicating if a low-cost carrier is
operating on route r.4 It aims to capture the potential inuence
of low-cost carriers on competition.
 Touristr is a dummy variable indicating whether at least one of
the cities on the route is a potential tourist destination.5 It
intends to eliminate the potential inuence of tourist trafc on
price dispersion.
 Distancer is a continuous variable that measures the distance
between origin and destination airport, serving as a proxy for
operating costs.
 Populationr is the average number of inhabitants in the
metropolitan areas of the two end points on route r. Following
Mantin and Koo (2009), this serves as a measure of potential
market size.
 Passengersr is calculated as the arithmetic mean of passengers
departed at the origin and destination airport on route r. Also
following Mantin and Koo (2009), this serves as a measure of
hubness.
 The dummy variables for the departure time are Morningfar
(5:00e9:59), Middayfar (10:00e13:59), Afternoonfar (14:00e
17:59) and Nightfar (18:00e23:59) for each ight f operated
by airline a on route r. These variables control for effects of
systematic peak load pricing (see also Gaggero and Piga, 2011).
Night ights are treated as a reference category and are
therefore omitted from the estimation equation.
 The dummy variables Airlinefar are controls for systematic
differences in price dispersion behaviour between airlines. The
parameter d1 for Lufthansa (a 1) is set to zero. Thus, the
remaining coefcients of airline dummies have to be interpreted as values relative to Lufthansa.
In the estimation process we apply the log odds ratios for the
two price dispersion measures, the Gini coefcient and Atkinson
index.6 These are calculated using:

PDMlodd lnPDM=1  PDM

(6)

4
The following airlines are considered LCC: Germanwings, Air Moldova, FlyBe,
Blue Panorama Air (Blu-Express), Norwegian Air Shuttle, Aer Lingus, Ryanair,
Transavia, Meridiana, Wind Jet, Skyways, SmartWings, EasyJet, Vueling Airlines and
Wizzair.
5
The following are considered tourist-destination airports: Malaga (AGP), Catania (CTA), Larnaca (LCA), Malta (MLA), Nice (NCE) and Palma (PMI).
6
Gerardi and Shapiro (2007) mention that the direct use of the Gini coefcient,
which is bounded between zero and one, may produce biased estimates. However,
we do not obtain different qualitative conclusions when using the Gini coefcient
itself as the dependent variable.

A. Obermeyer et al. / Journal of Air Transport Management 26 (2013) 31e34

Table 1
Regression results.
Variable
Constant
HHI2
HHI
Flights
LCC
Tourist
Distance
Population
Passengers
Morning
Midday
Afternoon
Adjusted R2
Observations

Table 2
Airline classication according to airline dummy regression results.
Glodd
3.1339***
2.0171***
2.1767**
0.1110***
0.3821***
0.7622***
0.0202
0.0772***
0.0644***
0.0248
0.1326*
0.0029
0.4690
1210

Alodd
0:5

ln T

6.2846***
3.3697**
3.6106*
0.2024***
0.6872***
1.4865***
0.0465
0.1683***
0.1220***
0.0415
0.2174
0.0362
0.4233

5.6029***
3.3747**
3.6356*
0.2013***
0.6806***
1.4914***
0.0465
0.1674***
0.1218***
0.0323
0.2134
0.0407
0.4206

Signicance levels: *** 1%; ** 5%; * 10%.

For estimation, we employ ordinary least squares with heteroscedasticity consistent standard errors.7
4. Results
The parameter estimates for all variables except airline
dummies are presented in Table 1. According to the resulting
adjusted degrees of determination, the model using the transformed Gini coefcient ts best. However, the values suggest that
a substantial part of the variation in price dispersion cannot be
explained by our model.
The parameter estimates of the market concentration variable
HHI prove a non-monotonic inverse U-shaped relationship
between the degree of competition and price dispersion. The
parameters have the correct sign and are statistically signicant
across all three model specications.8 Our ndings are similar to
that of Dai et al. (2011), who studied the US airline market.
Our results highlight that it is necessary to evaluate the actual
state of market concentration to draw conclusions about the
inuence of competition on price dispersion. For instance, the entry
of a new competitor leads to increasing price dispersion in a highly
concentrated market; by contrast, an additional airline in a less
concentrated market can decrease price dispersion.
With regard to the control variables, the following results were
obtained9: The magnitude of price dispersion grows with an
increasing number of ights on a specic route, the larger the
populations in the connected metropolitan areas, if a low-cost
carrier operates on the route and if at least one of the connected
metropolitan areas is a tourist destination.10 An increase in the
number of departing passengers at the airports seems to reduce
price dispersion.
A comparison of our results with other studies reveals similarities as well as deviations. The positive effect of the number of
ights on price dispersion has also been observed by Gaggero and
Piga (2011), who interpret this nding as an effect of using price
dispersion as a business-stealing competitive weapon; airlines
engage in greater price differentiation in response to the offering of
more ights on a given route. While the parameter estimates for

All estimations were carried out with the Gretl statistical software package.
To test whether our parameter estimates are biased due to multicollinearity we
performed additional regressions with centered market concentration variables;
see Tabachnick and Fidell (2007) for details on this method. Our conclusions,
however, are not affected. Since the use of centered variables complicates the
interpretation of the parameters, we present estimates for the uncentered models.
9
The variance ination factors of the control variables are clearly below ten.
Thus, multicollinearity is of no concern.
10
Variables have been scaled to avoid very small estimation coefcients.
8

33

Higher dispersion
than Lufthansa

Similar dispersion
to Lufthansa

Lower dispersion
than Lufthansa

British Midland
Ryanair
British Airways
LOT
SAS Scandinavian Airlines
Air Lingus
Air Berlin
Blue1
Flybe
Cimber Sterling
EasyJet
Travel Service
Vuelning Airlines

TAP Portugal
Spanair
Iberia
Luxair
Germanwings
Niki Luftfahrt
Norwegian Air Shuttle
Cyprus Airways
Bulgaria Air
Air Baltic
Estonian Air

Brussels Airlines
Malv Hungarian Airlines
TAROM
Olympic Air
Air Europa
Aegean Airlines
Air France
Air Malta
Finnair
Wind Jet
CSA Czech Airlines
KLM Royal Dutch Airlines
Alitalia
Blue Panorama Airlines
Austrian

Population and Passengers contradict the observations of Mantin

and Koo (2009), the low-cost carrier (LCC) effect is similar. In the
presence of LCCs, which are viewed as engaging in relatively high
intertemporal price differentiation in general, other carriers are
animated to adopt a lowehigh pricing strategy as well, leading to
a higher overall dispersion (Mantin and Koo, 2009). Following
Borenstein and Rose (1994), price discrimination is expected to
decrease as passenger groups become more homogeneous with
regard to their price elasticities of demand. Hence, price dispersion
should be lower on routes where the share of leisure passengers is
relatively high. While Borenstein and Rose conrmed this
hypothesis empirically, we observe a higher level of price dispersion on tourist routes.11
If the dummy for Lufthansa is dened as the default variable, the
results for the remaining airline parameters have a relative character. Table 2 identies carriers that persistently differentiate their
fares more or less strongly than Lufthansa as well as carriers that
show similar price differentiation behaviour.
Generally, past studies have approximated a production possibility frontier by performing parametric or non-parametric analysis. Productivity studies using data from a period of time
comparable to ours are Barbot et al. (2008) and Assaf and Josiassen
(2012). The former conducts a data envelopment analysis with data
from 2005 to compute total factor productivity (TFP) and efciency
scores. Their results show that low-cost carriers perform more
efciently than full service carriers. Assaf and Josiassen conrm
these ndings using a translog distance function and panel data
from 2001 to 2008. The efciency scores and TFP results in both
cases seem to be very similar to our airline dummy variable results,
in the sense that carriers which exhibit high efciency scores in
productivity studies show a tendency to differentiate fares stronger,
and vice versa. In particular, both studies calculate very high efciency and TFP scores for British Airways, Ryanair and EasyJet and
low efciency scores for Czech Airlines, Finnair, Malev, Austrian and
Alitalia. Iberia and Cyprus Airways achieve similar scores to Lufthansa in both studies. For TAP, KLM and Air France the ndings are
not sufciently clear, but the trend seems to be in line with our
airline dummy estimations. Finally, both studies calculate low
scores for LOT, but according to our ndings LOT seems to be in
a position to differentiate its fares more strongly than Lufthansa.
The reason for the ability of efcient airlines to differentiate
prices stronger is straightforward. More efcient airlines can use

11
This might be a result of our selection of tourist destinations. Due to limited
data availability we were not able to construct a continuous measure for this
variable, as was done, for example, by Borenstein and Rose (1994).

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A. Obermeyer et al. / Journal of Air Transport Management 26 (2013) 31e34

their cost advantage to lower air fares for price elastic customers.
Since the incentive to lower ticket prices for price inelastic
passengers is low, price dispersion can increase. At this point we
admit that the ndings are of rather heuristic nature. In order to
draw reliable results, econometric analysis that links efciency and
productivity analyses to price differentiation is required.
5. Conclusions
Past studies on the relationship between airline price
dispersion and intensity of market competition have arrived at
heterogeneous conclusions. Most of the early studies show
a monotonic e positive or negative e relationship between
competition and price dispersion. Recent research, however, has
found a non-monotonic relationship. Most of the existing
empirical studies focus on the US airline market. Only a few
studies have been conducted for Europe. Closing this gap, we
provide empirical evidence of a non-monotonic relationship for
the European airline market. We conrm an inverse U-shaped
relationship between the degree of competition and magnitude
of price dispersion for economy-class ights. Depending on the
actual level of market concentration, an increase in competition
either induces an increase or decrease in price dispersion. As
a consequence, the effects of market entries or mergers on the
level of price dispersion are not obvious a priori. In fact, to
predict the impact of such events on price dispersion, it is rst
necessary to evaluate the actual state of market concentration.

Acknowledgements
We wish to thank Andreas Schubert for his assistance collecting
data as well as the anonymous referees, who helped to improve the
paper. Any errors remain our own.

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