Internet penetration and airline pricing: Evidence from China

Abstract

This paper investigates the impacts of increasing Internet penetration on airfares and price dispersion in the Chinese airline market. It is found that an increase in Internet penetration is associated with higher average airfares and lower price dispersion between the major Chinese carriers. It appears that the increase in Internet penetration seems to have strengthened the major airlines’ ability to maintain price stability, which is an indication of the existence mutual forbearance among the major carriers confirmed in other studies. Higher prices and lower price dispersion are mostly to occur in the most heavily markets. This research also finds that if carriers possess similar degree of market power, the price dispersion between the airline pair is smaller. The findings can generate important policy insights, and inform anti-trust policies in the post-Covid period, when more consumers use Internet for search and inquiries, and when big data and artificial intelligence technologies mature.