A Model of Dynamic Limit Pricing with an Application to the Airline Industry

Andrew Sweeting, James W. Roberts and Chris Gedge

Journal of Political Economy, 2020, vol. 128, issue 3, 1148 - 1193

Abstract: We develop a dynamic limit pricing model where an incumbent repeatedly signals information relevant to a potential entrant’s expected profitability. The model is tractable, with a unique equilibrium under refinement, and dynamics contribute to large equilibrium price changes. We show that the model can explain why incumbent airlines cut prices dramatically on routes threatened with entry by Southwest, presenting new reduced-form evidence and a calibration that predicts a pattern of price changes across markets similar to the one observed in the data. We use our calibrated model to quantify the welfare effects of asymmetric information and subsidies designed to encourage Southwest’s entry.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://dx.doi.org/10.1086/704760 (application/pdf)
http://dx.doi.org/10.1086/704760 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/704760

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().