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Firm Financial Condition and Airline Price Wars

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  • Meghan Busse
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    Abstract

    A firm that knows that cutting price may trigger a price war must weigh present versus future gains and losses when considering such a move. The firm's financial situation can affect how it values such tradeoffs. Using data on 14 major airlines between 1985 and 1992, I test the hypothesis that firms in worse financial condition are more likely to start price wars. Empirical results suggest that this is true, particularly for highly leveraged firms. The article also explores which firms join existing price wars and finds that a firm is more likely to enter a price war the greater the share of its traffic on routes served by the price-war leader.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 33 (2002)
    Issue (Month): 2 (Summer)
    Pages: 298-318

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    Handle: RePEc:rje:randje:v:33:y:2002:i:summer:p:298-318

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    Cited by:
    1. Lee, Hwa Ryung, 2009. "Does Bankruptcy Protection Harm the Airline Industry?," Department of Economics, Working Paper Series qt0s40v0x9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Pot Erik & Peeters Ronald & Peters Hans & Vermeulen Dries, 2010. "Intentional Price Wars on the Equilibrium Path," Research Memoranda 028, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
    3. Leufkens, Kasper & Peeters, Ronald, 2008. "Focal prices and price cycles in an alternating price duopoly experiment," Research Memoranda 021, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
    4. Escobari, Diego, 2012. "Asymmetric Price Adjustments in Airlines," MPRA Paper 42115, University Library of Munich, Germany.
    5. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers 2003-22, Brown University, Department of Economics.
    6. Zhang, Yahua & Round, David K., 2011. "Price wars and price collusion in China's airline markets," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 361-372, July.
    7. Eslyn L. Jean-Baptiste & Michael H. Riordan, 2003. "Capital markets constrain industry scale," Discussion Papers 0304-05, Columbia University, Department of Economics.
    8. Michael H. Riordan, 2003. "How Do Capital Markets Influence Product Market Competition?," Review of Industrial Organization, Springer, vol. 23(3_4), pages 179-191, December.
    9. Steven L. Puller & Anirban Sengupta & Steven N. Wiggins, 2009. "Testing Theories of Scarcity Pricing in the Airline Industry," NBER Working Papers 15555, National Bureau of Economic Research, Inc.
    10. Bayer, Christian, 2007. "Investment timing and predatory behavior in a duopoly with endogenous exit," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3069-3109, September.
    11. Gordon M. Phillips & Giorgo Sertsios, 2011. "How Do Firm Financial Conditions Affect Product Quality and Pricing?," NBER Working Papers 17233, National Bureau of Economic Research, Inc.
    12. Christian Bayer, 2004. "The Other Side of Limited Liability: Predatory Behavior and Investment Timing," Industrial Organization 0407001, EconWPA.
    13. Hüschelrath, Kai & Müller, Kathrin, 2012. "The competitive effects of firm exit: Evidence from the US airline industry," ZEW Discussion Papers 12-037, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    14. Luís Cabral, 2005. "Collusion Theory: Where to Go Next?," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 199-206, December.
    15. Lee, Hwa Ryung, 2009. "Bankruptcies and low-cost Carrier Expansion in the Airline Industry," Department of Economics, Working Paper Series qt8g8639tn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    16. Yahua Zhang & David Round, 2009. "Policy Implications of the Effects of Concentration and Multimarket Contact in China’s Airline Market," Review of Industrial Organization, Springer, vol. 34(4), pages 307-326, June.

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