Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Ali Hortacsu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg and Kevin Williams

No 29508, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct sub-units. Using comprehensive data and internal models from a large U.S. airline, we establish that airline pricing is not well approximated by a model of the firm as a unitary decision-maker. We show that observed prices, however, can be rationalized by accounting for organizational structure and for the decisions by departments that are tasked with supplying inputs to the observed pricing heuristic. Simulating the prices the firm would charge if it were a rational, unitary decision-maker results in lower welfare than we estimate under observed practices. Finally, we discuss why counterfactual estimates of welfare and market power may be biased if prices are set through decomposition, but we instead assume that they are set by unitary decision-makers.

JEL-codes: C11 C53 D22 D42 L11 L93 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-com, nep-ind and nep-ore
Note: IO
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Citations: View citations in EconPapers (7)

Published as Ali Hortaçsu & Olivia R Natan & Hayden Parsley & Timothy Schwieg & Kevin R Williams, 2024. "Organizational Structure and Pricing: Evidence from a Large U.S. Airline," The Quarterly Journal of Economics, vol 139(2), pages 1149-1199.

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Working Paper: Organizational Structure and Pricing: Evidence from a Large U.S. Airline (2022)
Working Paper: Organizational Structure and Pricing: Evidence from a Large U.S. Airline (2021)
Working Paper: Organizational Structure and Pricing: Evidence from a Large U.S. Airline (2021)
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