Determinants of ‘Sticky Costs': An Analysis of Cost Behavior using United States Air Transportation Industry Data

Abstract

This paper examines determinants of sticky cost behavior (asymmetric cost changes in response to revenue increases and decreases). Cost accounting researchers have examined sticky costs to gain insights about management capacity decisions as demand fluctuates. The majority of the extant literature infers that costs decrease slower than they increase with demand fluctuations because management retains unused capacity in anticipation of future demand resurgence. I use United States Air Transportation industry data to provide empirical evidence that sticky costs are also associated with capacity and output selling price changes as management adjusts capacity and sales volume. Specifically, I conclude that sticky costs can arise when the marginal cost of adding capacity as demand grows is greater than the marginal benefit from reducing capacity as demand falls. Additionally, I provide some evidence that sticky costs arise as management drops output selling price to a greater degree as demand falls than they raise price as demand grows. These results identify additional determinants (to the retention of unused capacity) of sticky cost behavior, stressing the importance of using precise model specification to gain insights about management actions leading to sticky cost behavior.

Keywords: Sticky Costs, Cost Accounting, Capacity Decisions, Air Transportation

JEL Classification: M41