In this paper, we empirically examine the effects of bankruptcy protection (Chapter 11) on an airline and its rivals' pricing strategies. We estimate a price equation on a panel of 400 routes over the period 1987- 1993. We also examine the impact of bankruptcy on a firm's average operating costs. The results indicate that a bankrupt airline is able to lower its operating costs and that these cost reductions are partially translated into lower prices. Rivals appear to lower their prices more than the bankrupt carrier. Their reaction appears stronger in dense markets and in markets where they face a bankrupt airline that will not survive its bankruptcy. They also appear to start lowering their prices prior to the bankruptcy of the weak airline. These results are consistent with aggressive pricing by rivals and the magnitude of the estimated effects suggest that they may have contributed, in part, to the financial losses of the industry in the early nineties.
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