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Value pricing - continued

Value pricing - continued. Within a day or two after AA announcement on April 9, new structure is adopted by most major carriers Industry watchers applaud Value Pricing: “brilliant move” April 12: TWA undercuts AAnytime fares by 10-20% Further cuts by Am. West, Continental, USAir same week

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Value pricing - continued

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  1. Value pricing - continued • Within a day or two after AA announcement on April 9, new structure is adopted by most major carriers • Industry watchers applaud Value Pricing: “brilliant move” • April 12: TWA undercuts AAnytime fares by 10-20% • Further cuts by Am. West, Continental, USAir same week • AA makes selected price cuts • May 26: NWA announces “Grownups Fly Free” for the summer months: free ticket to >12 accompanied by paying 2-17 yr. old • How should American respond?

  2. Value pricing – the end • AA responds next day with half-price fares for everyone during summer months • Crandall: must hold on to structure! • Observer: “NW airlines aimed a water pistol at American. American responded with a fire hose” • NWA and Continental sues American for predatory pricing in summer 1992 • American wins the case in July 1993 • Is predatory pricing likely to be a successful strategy in airline industry? • American abandoned Value pricing in October 1992

  3. American Airlines takeaways • (Messy) illustration of factors that make price coordination easy or difficult: transparency vs. asymmetries and excess capacity • In this case, lots of rhetoric to cut through. E.g. • “Lower fares” – How are customers really affected? • “Increase revenue” – consistent with elasticities? • Effects of change in price level on demand, revenue, market share etc. depend on how rivals respond. • Crandall should have anticipated (and probably did) that most rivals would immediately match price cuts.

  4. American Airlines takeaways (2) • Change in fare structure • Isn’t price discrimination normally good for airlines? Why move away from that? • Connect Value Pricing to theory about industry factors and facilitating practices • Fewer products, no secret price cuts, pricing formula, price leadership • Value pricing didn’t work, but was it a good or bad idea? To what extent could/should Crandall have foreseen what others would do?

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