Firm Financial Condition and Airline Price Wars
Year: 2002
Type: article
Abstract: If cutting price can trigger a price war, then a firm must weigh present versus future gains and losses when considering such a move. How a firm values such tradeoffs can be affected by its financial situation. Using data on 14 major airlines between 1985 and 1992, this paper tests 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 paper also explores which firms join existing price wars, and finds that a firm is more likely to enter a price war when the share of its traffic on routes that are also served by the price war leader is greater.
Source: The RAND Journal of Economics
DOI: 10.2307/3087435
Author: Meghan R. Busse
Institution: University of California, Berkeley
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3123662784