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

Leola Ross

International Journal of the Economics of Business, 1997, vol. 4, issue 2, 109-127

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.

Keywords: Price wars; Airline industry studies; Multimarket contact, JEL classifications: LI3, L93, (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (6)

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DOI: 10.1080/758516223

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