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

45 Pages Posted: 16 Aug 2016 Last revised: 2 Feb 2019

See all articles by James N. Cannon

James N. Cannon

Utah State University, School of Accountancy; Iowa State University

Olena V. Watanabe

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: January 31, 2019

Abstract

We examine airlines’ pricing behavior with respect to fuel cost fluctuations. Managerial accounting “cost-plus” pricing models claim that a firm would adjust the selling price of a product to “pass through” an increase or decrease in the cost of an input. However, popular press argues that airlines opportunistically retain selling prices when fuel costs decrease. In contrast, we document pricing more consistent with consumer power: airlines pass through twice as much cost savings to consumers as they do fuel cost increases. Further, when managers do increase selling prices in response to rising fuel costs, the firms increase capital re-investment and compensation per employee, but decrease overall salary expense and cash distributions to shareholders. Thus, we conclude that airline managers’ pricing behavior is inconsistent with the concerns that airlines opportunistically price for changes in fuel input costs

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

Suggested Citation

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 (January 31, 2019). Available at SSRN: https://ssrn.com/abstract=2824026 or http://dx.doi.org/10.2139/ssrn.2824026

James N. Cannon (Contact Author)

Utah State University, School of Accountancy ( email )

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

Iowa State University ( email )

Ames, IA 50011-2063
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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