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Quarterly Journal of Economics Vol. 139 No. 2 2024

Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Ali Hortaçsu1; Olivia Natan2; Hayden Parsley3; Timothy Schwieg4; Kevin R. Williams5

1 University of Chicago and National Bureau of Economic Research , United States · 2 University of California , Berkeley, United States · 3 University of Texas, Austin , United States · 4 University of Chicago , United States · 5 Yale School of Management and National Bureau of Economic Research , United States

Abstract

Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct subunits. Using comprehensive 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 accounting for organizational structure and for 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.

DOI
10.1093/qje/qjad051
Volume
139
Issue
2
Pages
1149-1199
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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