Firm financial condition and airline price wars

Meghan Busse*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

71 Scopus citations

Abstract

A firm that knows that cutting price may trigger a price war must weigh present versus future gains and losses when considering such a move. The firm's financial situation can affect how it values such tradeoffs. Using data on 14 major airlines between 1985 and 1992, I test 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 article also explores which firms join existing price wars and finds that a firm is more likely to enter a price war the greater the share of its traffic on routes served by the price-war leader.

Original languageEnglish (US)
Pages (from-to)298-318
Number of pages21
JournalRAND Journal of Economics
Volume33
Issue number2
DOIs
StatePublished - 2002

ASJC Scopus subject areas

  • Economics and Econometrics

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