Document Type
Discussion Paper
Publication Date
6-1-2023
CFDP Number
2312r4
CFDP Pages
160
Journal of Economic Literature (JEL) Code(s)
C11, C53, D22, D42, L10, L93
Abstract
Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct sub-units. Using comprehen-sive 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 account-ing for organizational structure and 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.
Recommended Citation
Hortaçsu, Ali; Natan, Olivia R.; Parsley, Hayden; Schwieg, Timothy; and Williams, Kevin R., "Organizational Structure and Pricing: Evidence from a Large U.S. Airline" (2023). Cowles Foundation Discussion Papers. 2766.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2766