Why do all the flights leave at 8 am?: Competition and departure-time differentiation in airline markets

Theoretical models of spatial product differentiation indicate that firms face two opposing incentives: (1) minimize differentiation in order to "steal" customers from competitors, and (2) maximize differentiation in order to reduce price competition. Using data on U.S. airline departure times from 1975, when fares were regulated, and 1986, when fans were not regulated, we empirically estimate the effect of competition on differentiation. We find a negative relationship in both periods. In 1986, however, reductions in exogenous scheduling constraints increase differentiation, implying that firms may be differentiating their products where possible to reduce price competition. This effect is not apparent in the 1975 data. (C) 1999 Elsevier Science B.V. All rights reserved.