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Firm Financial Condition and Airline Price Wars

Meghan Busse
The RAND Journal of Economics
Vol. 33, No. 2 (Summer, 2002), pp. 298-318
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/3087435
Page Count: 21
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Firm Financial Condition and Airline Price Wars
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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.

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