Author's Personal Copy Bankruptcy and Product-market Competition: Evidence from the Airline Industry ☆

In most cases authors are permitted to post their version of the article (e.g. in Word or Tex form) to their personal website or institutional repository. Authors requiring further information regarding Elsevier's archiving and manuscript policies are encouraged to visit: a b s t r a c t a r t i c l e i n f o We investigate the effects of Chapter 11 bankruptcy filings on product market competition using data from the US airline industry. We find: i) bankrupt airlines permanently downsize their national route structure, their airport-specific networks, and their route-specific flight frequency and capacity; ii) bankrupt airlines lower their route-specific prices while under bankruptcy protection, and increase them after emerging. We do not find robust evidence of significant changes by the bankrupt airline's competitors along any of the dimensions above. In the past few years thousands of firms have filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Law. 2 Firms filing for bankruptcy protection belong to a wide range of industries , from Lehman Brothers to Chrysler and GM. 3 The unprecedented number of filings has led to a renewed interest in the economics of bankruptcy. Most of the previous work has examined the direct costs of bankruptcy proceedings, such as legal and administrative expenses, as well as their indirect costs, such as lost salesless, there is surprisingly little work on the effects of bankruptcy filings on product market competition. This paper uses data from the US airline industry to investigate the effect of Chapter 11 filings on prices, capacity choices, and networks. These data are from one single industry for which we have data from a cross-section of local markets. This allows an examination of how bankruptcy filings affect the strategic decisions of firms, holding industry fixed. In this sense, our approach is in the same spirit as Chevalier (1995a, 1995b), who uncovers basic stylized patterns in the relationship between leverage buyouts and the pricing behavior of firms and their rivals using cross-section data from the US supermarket industry. The airline industry provides an interesting empirical framework for several additional reasons. First, air transport is arguably the most important means of transportation in the US. Second, the airlines seeking A previous version of this paper was circulated under the title " Financial Decisions, Bankruptcy, and Product-Market Competition in the Airline Industry ". All remaining errors are our own.