Dissertation Defense: Yihui Fu
Candidate: Yihui Fu
Major: Economics
Advisor: John Rust, Ph.D.
Title: Essays on Competition Effects in the Airline Market
Chapter 1 of this thesis study the effect of competition on prices in China’s airline market and is co-authored with Tianshi Mu. We exploit a unique data including prices and sales for almost all routes in China in between May and December in 2017, spanning two flight seasons between which airlines can adjust their flight schedules. We use a reduced-form model to estimate causal effects of competition on prices and sales. We find a significant drop in prices, between 1.9% and 7.2% depending on different identification strategies, but very limited and non-significant effects on flight-level load factors for incumbents. We also investigate the heterogeneity of the competition effects on prices. We study the effects of entry on dynamic pricing by focusing on prices each day before the day of departure, and find that the competition effect is larger when time approaches the departure date.
Chapter 2 of thesis tests the theory that predicts how the competition will affect price dispersion and is co-authored with Qian Wang. We complement the past price dispersion studies by making two contributions: First, we accurately identify and isolate three types of price dispersion originating from either third-degree price discrimination or peak-lead pricing. Second, we test the relative contribution of industry- elasticity and cross-price elasticity to price dispersion. Results suggest that both cross-price elasticity and industry-elasticity are crucial in determining the relationship between price dispersion and competition. Consistent with Borenstein and Rose (1994), we find that more competition will increase both the intertemporal price dispersion and the across-date price dispersion but not the across-slot price dispersion.
Chapter 3 provides background and data description about airline market in China, and documents two important policy changes happened in 2018 that can be future research topics. Specifically, it documents the loose of price cap and the change in the priority order of the slot allocations. The empirical evidence shows that the loose of price cap could lead to a stronger price dispersion among purchase date. Leisure travellers who purchase their tickets early enough from the departure date may be better off due to potentially lower prices, and business travellers who purchase their tickets right before the departure are almost surely worse off.
Index words: Airline market, competition effects, difference-in-differences, dynamic pricing, price dispersion, antitrust