Product line competition: An empirical analysis of the Chinese airline industry

Consumer heterogeneity drives airlines to compete through product lines in the form of different flights and ticket policies (e.g., change fee) on the same flight. Using ticket-level data from a major Chinese online provider of travel services, we explore airlines' choices of product lines, as well as the resulting prices and price dispersion. We introduce a flight-level competition measure and find it more effective than typical route-level competition measures such as Herfindahl-Hirschman index (HHI) in predicting airlines' product line and pricing decisions. We leverage our disaggregated data to measure a carrier's price dispersion at the flight, route, and day level, respectively. For each level, we also decompose the overall price dispersion into a within-group component and a between-group component, respectively. Our results suggest that the effects of competition on price dispersion depend on the level it is measured at as well as the components. Ticket policies in our data are direct measures of quality, and we use this measure to study quality provision and dispersion.