Financial Condition and Product Market Cooperation

40 Pages Posted: 19 Mar 2011 Last revised: 23 Nov 2016

See all articles by Matthew Gustafson

Matthew Gustafson

Pennsylvania State University - Smeal College of Business

Ivan Ivanov

Board of Governors of the Federal Reserve System

John Ritter

Securities and Exchange Commission (SEC)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2, 2014

Abstract

We provide evidence that existing studies relating financial condition to product market cooperation produce mixed results because of unique features of the industries examined. In particular, all evidence suggesting that poor financial condition decreases cooperation comes from the airline industry during periods of high idle capacity. Using a unique data set of aggregate airfare hikes and a more recent low-idle-capacity period, we find that poor financial condition is positively associated with product market cooperation. Although financially weak airlines appear to value the immediate cash flows of increased cooperation, only liquidity-constrained firms seem willing to incur the cost of cooperative attempts.

Keywords: Short-term Liquidity, Financial Distress, Tacit Collusion, Capacity Constraints, Airfare Price Hikes

Suggested Citation

Gustafson, Matthew and Ivanov, Ivan and Ritter, John, Financial Condition and Product Market Cooperation (July 2, 2014). Journal of Corporate Finance, Vol. 31, p. 1-16, 2015. Available at SSRN: https://ssrn.com/abstract=1787333 or http://dx.doi.org/10.2139/ssrn.1787333

Matthew Gustafson

Pennsylvania State University - Smeal College of Business ( email )

East Park Avenue
University Park, PA 16802
United States

Ivan Ivanov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

John Ritter

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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