Document Type

Discussion Paper

Publication Date


CFDP Number


CFDP Pages


Journal of Economic Literature (JEL) Code(s)

C11, C53, D22, D42, L10, L93


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.

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