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Asymmetric Price Adjustments in Airlines

Author

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  • Diego Escobari

Abstract

This paper uses a unique daily time series data set to investigate the asymmetric response of airline prices to capacity costs driven by demand fluctuations. We use a Markov regime-switching model with time-varying transition probabilities to capture the time variation in the response. The results show strong evidence of asymmetric price adjustments: positive cost shifts have a large positive effect, while negative cost shifts have no effect. The asymmetry is also explained by summer travel, but not by the size of cost shifts. The findings show the importance of consumer heterogeneity and capacity constraints as a source of asymmetric responses.
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Suggested Citation

  • Diego Escobari, 2013. "Asymmetric Price Adjustments in Airlines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(2), pages 74-85, March.
    • Handle: RePEc:wly:mgtdec:v:34:y:2013:i:2:p:74-85
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    Cited by:

    1. Pal, Debdatta & Mitra, Subrata K., 2022. "Do airfares respond asymmetrically to fuel price changes? A multiple threshold nonlinear ARDL model," Energy Economics, Elsevier, vol. 111(C).
    2. Escobari, Diego & Sharma, Shahil, 2020. "Explaining the nonlinear response of stock markets to oil price shocks," Energy, Elsevier, vol. 213(C).
    3. Wolter, Alexander H. & Ehlers, Thorsten & Luetjens, Klaus & Gollnick, Volker, 2021. "Commodity price pass-through in the US airline industry and the hidden perks of consolidation," Journal of Air Transport Management, Elsevier, vol. 95(C).
    4. Raeder, Francisco Teixeira, 2025. "Airfares adjustment to fuel price shocks: Evidence from the Brazilian airline market," Journal of Air Transport Management, Elsevier, vol. 125(C).
    5. Wadud, Zia, 2015. "Imperfect reversibility of air transport demand: Effects of air fare, fuel prices and price transmission," Transportation Research Part A: Policy and Practice, Elsevier, vol. 72(C), pages 16-26.
    6. Killins, Robert N. & Egly, Peter V. & Escobari, Diego, 2017. "The impact of oil shocks on the housing market: Evidence from Canada and U.S," Journal of Economics and Business, Elsevier, vol. 93(C), pages 15-28.
    7. Rosselló, Jaume & Sansó, Andreu, 2017. "Yearly, monthly and weekly seasonality of tourism demand: A decomposition analysis," Tourism Management, Elsevier, vol. 60(C), pages 379-389.
    8. Diego Escobari & Jim Lee, 2014. "Demand uncertainty and capacity utilization in airlines," Empirical Economics, Springer, vol. 47(1), pages 1-19, August.
    9. Wadud, Zia, 2014. "The asymmetric effects of income and fuel price on air transport demand," Transportation Research Part A: Policy and Practice, Elsevier, vol. 65(C), pages 92-102.

    More about this item

    JEL classification:

    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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