Value pricing - continuedValue pricing - continued

Within a day or two after AA announcement on April 9, new Within a day or two after AA announcement on April 9, new

structure is adopted by most major carriersstructure 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 weekFurther cuts by Am. West, Continental, USAir same week AA makes selected price cutsAA makes selected price cuts May 26: NWA announces “Grownups Fly Free” for the summer May 26: NWA announces “Grownups Fly Free” for the summer

months: free ticket to >12 accompanied by paying 2-17 yr. oldmonths: free ticket to >12 accompanied by paying 2-17 yr. old How should American respond?How should American respond?

Value pricing – the endValue pricing – the end

AA responds next day with half-price fares for AA responds next day with half-price fares for everyoneeveryone

during summer monthsduring summer months Crandall: must hold on to structure!Crandall: must hold on to structure!

– Observer: “NW airlines aimed a water pistol at American. Observer: “NW airlines aimed a water pistol at American.

American responded with a fire hose”American responded with a fire hose” NWA and Continental sues American for predatory NWA and Continental sues American for predatory

pricing in summer 1992pricing in summer 1992 American wins the case in July 1993American wins the case in July 1993

– Is predatory pricing likely to be a successful strategy in airline Is predatory pricing likely to be a successful strategy in airline

industry?industry? American abandoned Value pricing in October 1992American abandoned Value pricing in October 1992

American Airlines takeawaysAmerican Airlines takeaways

(Messy) illustration of factors that make price (Messy) illustration of factors that make price

coordination easy or difficult: transparency vs. coordination easy or difficult: transparency vs.

asymmetries and excess capacityasymmetries 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?Lower fares” – How are customers really affected?

– ““Increase revenue” – consistent with elasticities?Increase revenue” – consistent with elasticities?

Effects of change in price level on demand, revenue, Effects of change in price level on demand, revenue,

market share etc. depend on how rivals respond.market share etc. depend on how rivals respond.– Crandall should have anticipated (and probably did) that most Crandall should have anticipated (and probably did) that most

rivals would immediately match price cuts.rivals would immediately match price cuts.

American Airlines takeaways (2)American Airlines takeaways (2)

Change in fare structureChange in fare structure– Isn’t price discrimination normally good for airlines? Why move Isn’t price discrimination normally good for airlines? Why move

away from that?away from that?

Connect Value Pricing to theory about industry factors Connect Value Pricing to theory about industry factors

and facilitating practicesand facilitating practices– Fewer products, no secret price cuts, pricing formula, price Fewer products, no secret price cuts, pricing formula, price

leadershipleadership

Value pricing didn’t work, but was it a good or bad idea? Value pricing didn’t work, but was it a good or bad idea?

To what extent could/should Crandall have foreseen To what extent could/should Crandall have foreseen

what others would do?what others would do?