Price asymmetries in the US airline industry

Abstract

AbstractWe document price asymmetries in the US airline industry. We find evidence that the average airfare increases in response to rising fuel cost but does not decrease in response to declining fuel cost. In searching for the cause of price asymmetries, we find that common ownership, measured by overlapping institutional investors, is associated with greater price asymmetry in the airline industry. To mitigate endogeneity concerns, we exploit the variation in common ownership induced by the financial institution mergers and conduct a difference‐in‐differences test to establish the causal effects of common ownership on price asymmetry in the airline industry. In addition, airlines in highly concentrated markets exhibit more price asymmetries than those in low concentration markets. Our results support focal price tacit collusion as an important determinant of asymmetric pricing. Furthermore, first‐class airfares are shown to decrease more slowly than economy‐class airfares in response to fuel cost decreases, which supports consumer search as the mechanism driving asymmetric pricing.