Bankruptcy and Pricing Behavior in U.S. Airline Markets
by Severin Borenstein of the University of California, Davis, and
Abstract: Modern economics has generated many theories of the ways in which a firm's financial condition may affect its conduct in the product market. Although some of these imply that a company constrained by capital structure or financial distress will compete less aggressively, managers often argue that firms in financial trouble have "nothing to lose" and will slash prices to "generate cash." Perhaps nowhere has this view been repeated more often than in the airline industry. Executives at major carriers as well as a special government commission on the industry's financial woes have argued that financially weak airlines, and especially those under Chapter 11 bankruptcy protection, have cut prices and harmed the financial health of the industry.
Published in: American Economic Review, Vol. 85, No. 2, (May 1995), pp. 397-402.
Previously titled: Do Airlines in Chapter 11 Harm Their Rivals?: Bankruptcy and Pricing Behavior in U.S. Airline Markets