Do Airlines in Chapter 11 Harm Their Rivals? Bankruptcy and Pricing Behavior in U.S. Airline Markets

25 Pages Posted: 11 Aug 2000 Last revised: 17 Oct 2022

See all articles by Severin Borenstein

Severin Borenstein

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Nancy L. Rose

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 1995

Abstract

The behavior of firms in financial distress has attracted considerable academic and policy interest in recent years. The turmoil in the U.S. airline industry has triggered much of the public policy discussion, as some observers have argued that airlines in financial distress, particularly those operating under Chapter 11 bankruptcy protection, reduce prices to the point of harming themselves and their competitors. This study investigates the pricing strategies of bankrupt airlines and their rivals. The data suggest that an airline's prices typically decline somewhat before it files for bankruptcy protection and remain slightly depressed over the subsequent two or three quarters. We find no evidence that competitors of the bankrupt airline lower their prices, however, nor that they lose passengers to their bankrupt rival. These results indicate that bankrupt carriers do not harm the financial health of their competitors.

Suggested Citation

Borenstein, Severin and Rose, Nancy L., Do Airlines in Chapter 11 Harm Their Rivals? Bankruptcy and Pricing Behavior in U.S. Airline Markets (February 1995). NBER Working Paper No. w5047, Available at SSRN: https://ssrn.com/abstract=225826

Severin Borenstein (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
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National Bureau of Economic Research (NBER)

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Nancy L. Rose

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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