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Firm Financial Condition and Airline Price Wars

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  • Meghan R. Busse

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    (Haas School of Business)

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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

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm281.

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    Date of creation: 15 May 2002
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    Handle: RePEc:ysm:somwrk:ysm281

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    Web page: http://icf.som.yale.edu/
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    Cited by:
    1. 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.
    2. Hüschelrath, Kai & Müller, Kathrin, 2013. "The competitive effects of firm exit," Economics of Transportation, Elsevier, vol. 2(2), pages 72-85.
    3. Christian Bayer, 2004. "The Other Side of Limited Liability: Predatory Behavior and Investment Timing," Industrial Organization 0407001, EconWPA.
    4. David A. Matsa, 2011. "Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 137-73, February.
    5. Michael Riordan, 2003. "How Do Capital Markets Influence Product Market Competition?," Review of Industrial Organization, Springer, vol. 23(3), pages 179-191, December.
    6. 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.
    7. 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.
    8. Leufkens, Kasper & Peeters, Ronald, 2008. "Focal prices and price cycles in an alternating price duopoly experiment," Research Memorandum 021, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    9. 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.
    10. 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.
    11. Luís Cabral, 2005. "Collusion Theory: Where to Go Next?," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 199-206, December.
    12. 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.
    13. 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.
    14. 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.
    15. 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.

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