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Firm Financial Condition and Airline Price Wars

Meghan R. Busse

University of California, Berkeley - Haas School of Business

April 2000

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.

Number of Pages in PDF File: 58

Keywords: Price wars, airlines, financial constraint, liquidity constraint

JEL Classification: L11, L13, L93

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Date posted: October 10, 2000  

Suggested Citation

Busse, Meghan R., Firm Financial Condition and Airline Price Wars (April 2000). Available at SSRN: http://ssrn.com/abstract=237374 or http://dx.doi.org/10.2139/ssrn.237374

Contact Information

Meghan R. Busse (Contact Author)
University of California, Berkeley - Haas School of Business ( email )
2220 Piedmont Avenue, #1900
Berkeley, CA 94720-1900
United States
510-642-9489 (Phone)
510-643-5180 (Fax)
HOME PAGE: http://faculty.haas.berkeley.edu/meghan/index.html
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References:  36
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