Does Competition Increase or Decrease Price Dispersion? Insights from One‐Way vs. Round‐Trip Airfares*

Abstract Does competition increase or decrease price dispersion? Our study addresses this long‐standing debate by presenting an intriguing empirical puzzle. Specifically, leveraging an extended panel from the U.S. airline industry between 1993 and 2013, we find that competition intensity and price dispersion are positively correlated for one‐way tickets but negatively correlated for round‐trip products. We posit that the recent growth in one‐way ticket sales may have led airlines to adjust their pricing strategies to allow for more effective market segmentation. Our study contributes to the empirical literature on price dispersion across multiple goods and helps inform antitrust policy on product bundling.