Firm Financial Condition and Airline Price Wars

Meghan R. Busse

153 citations0/0 files storedThe RAND Journal of Economics

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Aviation Industry Analysis and Trends Merger and Competition Analysis Consumer Market Behavior and Pricing

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.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1991The Theory of Capital Structure 1984Noncooperative Collusion under Imperfect Price Information 2007Credit Rationing in Markets With Imperfect Information 1995Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade 1989Oligopoly and financial structure: the limited liability effect 1987Competition and Collusion in the American Automobile Industry: The 1955 Price War

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