Do Firms Pass Commodity Cost Savings to Consumers? Evidence and Impacts of Asymmetric Pricing Behavior in the U.S. Airline Industry

53 Pages Posted: 16 Aug 2016 Last revised: 23 Dec 2020

See all articles by James N. Cannon

James N. Cannon

Iowa State University; Utah State University, School of Accountancy

Olena V. Watanabe

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: December 21, 2020

Abstract

We examine airlines’ pricing behavior with respect to fuel cost fluctuations. Managerial accounting “cost-plus” pricing models assume that a firm would adjust selling prices to “pass through” an increase or decrease in the costs of inputs. Using archival data, we find some evidence of airline pricing power -- managers opportunistically retain selling prices when fuel costs decrease. We also document pricing behavior that is more consistent with consumer power: airlines absorb a larger portion of commodity cost increases than they enjoy commodity costs decreases. Further, the periods of airline pricing power and consumer power correlate rationally with the changes in the economic environment within the airline industry. Managers offset margins eroded by commodity fuel cost increases by reducing employee compensation, increasing long-term debt, and by depleting cash reserves. Retained cost savings reverse some of those trends.

Keywords: pricing behavior, input costs, airline industry, opportunistic pricing

Suggested Citation

Cannon, James N. and Cannon, James N. and Watanabe, Olena V., Do Firms Pass Commodity Cost Savings to Consumers? Evidence and Impacts of Asymmetric Pricing Behavior in the U.S. Airline Industry (December 21, 2020). Available at SSRN: https://ssrn.com/abstract=2824026 or http://dx.doi.org/10.2139/ssrn.2824026

James N. Cannon (Contact Author)

Iowa State University ( email )

Ames, IA 50011-2063
United States
801-927-7718 (Phone)

Utah State University, School of Accountancy ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
801-927-7718 (Phone)

Olena V. Watanabe

Iowa State University - Debbie and Jerry Ivy College of Business ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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