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How Do Firm Financial Conditions Affect Product Quality and Pricing?

  • Gordon M. Phillips
  • Giorgo Sertsios

We analyze the interaction of firm product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline's choices of quality and price as dynamic decisions that trade off current cash flows for future revenue. We examine how airline mishandled baggage, on-time performance and pricing are related to financial distress and bankruptcy, controlling for the endogeneity of financial distress and bankruptcy. We find that an airline's quality decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, consistent with financial distress reducing a firm's incentive to invest in quality. In contrast, in bankruptcy product quality increases relative to financial distress. In addition, we find that firms price more aggressively when in financial distress consistent with firms trying to increase short-term market share and revenues.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17233.

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Date of creation: Jul 2011
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Publication status: published as “How Do Firm Financial Conditions A ff ect Product Quality and Pricing?” with Giorgo Sertsios, Management Science , 2013, 59(8): 1764-1782.
Handle: RePEc:nbr:nberwo:17233
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