How Do Firm Financial Conditions Affect Product Quality and Pricing? / Gordon M. Phillips, Giorgo Sertsios.

Format:

Book

Author/Creator:

Phillips, Gordon M.

Contributor:

National Bureau of Economic Research.

Sertsios, Giorgo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17233.

NBER working paper series no. w17233

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

We analyze the interaction of firm product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline's choices of quality and price as dynamic decisions that trade off current cash flows for future revenue. We examine how airline mishandled baggage, on-time performance and pricing are related to financial distress and bankruptcy, controlling for the endogeneity of financial distress and bankruptcy. We find that an airline's quality decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, consistent with financial distress reducing a firm's incentive to invest in quality. In contrast, in bankruptcy product quality increases relative to financial distress. In addition, we find that firms price more aggressively when in financial distress consistent with firms trying to increase short-term market share and revenues.

Notes:

Print version record

July 2011.