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When Will an Airline Stand Its Ground? An Analysis of Fare Wars

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  • Leola Ross

Abstract

The research presented in this paper focuses on the recent onset of price wars in the airline industry while accommodating multimarket contact, multiple products, and a dispersed price distribution. An important innovation in this study is in developing a price war definition using a rank dominance criterion. A second innovation is the extension of a probit model to a bivariate probit, which assesses the behavior of multimarket firms after a price war occurs. In particular, a carrier may choose to stay and fight when a price war erupts or may simply leave a route. Carriers will engage in fare wars when market shares change, higher elasticity customers patron the route, and load factors drop. Carriers will leave routes after a fare war when offering service to another carrier's hub but will remain steadfast in their own spheres of influence.

Suggested Citation

  • Leola Ross, 1997. "When Will an Airline Stand Its Ground? An Analysis of Fare Wars," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(2), pages 109-127.
    • Handle: RePEc:taf:ijecbs:v:4:y:1997:i:2:p:109-127
    DOI: 10.1080/758516223
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    Cited by:

    1. Marcelo Resende & Rodrigo M. Zeidan, 2011. "Tacit Collusion under Imperfect Monitoring in the Canadian Manufacturing Industry: An Empirical Study," CESifo Working Paper Series 3623, CESifo.
    2. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers 2003-22, Brown University, Department of Economics.
    3. Zhang, Yahua & Round, David K., 2011. "Price wars and price collusion in China's airline markets," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 361-372, July.
    4. Ma, Wenliang & Wang, Qiang & Yang, Hangjun & Zhang, Yahua, 2019. "An analysis of price competition and price wars in Australia's domestic airline market," Transport Policy, Elsevier, vol. 81(C), pages 163-172.
    5. García-Gallego, Aurora & Georgantzís, Nikolaos & Jaramillo-Gutiérrez, Ainhoa & Pereira, Pedro & Pernías-Cerrillo, J. Carlos, 2014. "On the evolution of monopoly pricing in Internet-assisted search markets," Journal of Business Research, Elsevier, vol. 67(5), pages 795-801.
    6. Ila Alam & Leola Ross & Robin Sickles, 2001. "Time Series Analysis of Strategic Pricing Behavior in the US Airline Industry," Journal of Productivity Analysis, Springer, vol. 16(1), pages 49-62, July.

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    More about this item

    Keywords

    Price wars; Airline industry studies; Multimarket contact; JEL classifications: LI3; L93;
    All these keywords.

    JEL classification:

    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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