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

Value pricing – the end AA responds next day with half-price fares for everyone during summer months AA responds next day with half-price fares for everyone during summer months Crandall: must hold on to structure! 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 NWA and Continental sues American for predatory pricing in summer 1992 American wins the case in July 1993 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 American abandoned Value pricing in October 1992

American Airlines takeaways (Messy) illustration of factors that make price coordination easy or difficult: transparency vs. asymmetries and excess capacity (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. 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. 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.

American Airlines takeaways (2) Change in fare structure 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 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? 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?