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Sensitivity of prices to demand shocks: A natural experiment in the San Francisco Bay Area

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  • Bilotkach, Volodymyr
  • Gorodnichenko, Yuriy
  • Talavera, Oleksandr

Abstract

We analyze the impact of a freeway interchange collapse in the San Francisco Bay Area on the difference in airfare quotes for travel into the area’s main airports. The incident temporarily made Oakland airport a less attractive choice for traveling to San Francisco, so we hypothesize that fares for travel into Oakland will be relatively lower while the freeway interchange was out of service. We test our contention using a sample of fare quotes collected on-line, and find the expected effect of a magnitude of 6–7%. Our results imply the following important conclusions. First, the demand-side shock was well absorbed by the supply side. Second, adjustment of prices and return to the status quo once the shock vanished was swift.

Suggested Citation

  • Bilotkach, Volodymyr & Gorodnichenko, Yuriy & Talavera, Oleksandr, 2012. "Sensitivity of prices to demand shocks: A natural experiment in the San Francisco Bay Area," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(7), pages 1137-1151.
  • Handle: RePEc:eee:transa:v:46:y:2012:i:7:p:1137-1151
    DOI: 10.1016/j.tra.2012.02.018
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    References listed on IDEAS

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    1. Escobari, Diego & Jindapon, Paan, 2014. "Price discrimination through refund contracts in airlines," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 1-8.
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    Cited by:

    1. Nesset, Erik & Helgesen, Øyvind, 2014. "Effects of switching costs on customer attitude loyalty to an airport in a multi-airport region," Transportation Research Part A: Policy and Practice, Elsevier, vol. 67(C), pages 240-253.
    2. repec:eee:transa:v:103:y:2017:i:c:p:198-210 is not listed on IDEAS
    3. repec:eee:regeco:v:66:y:2017:i:c:p:74-90 is not listed on IDEAS
    4. Escobari, Diego, 2017. "Airport, airline and departure time choice and substitution patterns: An empirical analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 103(C), pages 198-210.

    More about this item

    Keywords

    Natural experiment; Price stability; Demand shocks; Congestion;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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