Savings that Hurt: Production Rationalization and its Effect on Prices
By Varela Mauricio, Madhu Viswanathan
Journal of Economics & Management Strategy | May 2020
DOI
doi.org/10.1111/jems.12330
Citation
Mauricio, Varela., Viswanathan, Madhu. Savings that Hurt: Production Rationalization and its Effect on Prices Journal of Economics & Management Strategy doi.org/10.1111/jems.12330.
Copyright
Journal of Economics & Management Strategy, 2020
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Abstract
Postmerger scenarios often lead to a reallocation of resources and production across the merged entity. Production rationalization, the process of reallocating production across facilities so as to reduce total costs, results in firms equating marginal costs across markets. This results in marginal costs, and hence prices, being higher in some markets and lower in others than otherwise would be without production rationalization. This paper proposes a model of competition that elicits these effects and the resulting consequences on consumer and producer surplus. The paper also presents empirical evidence to show that production rationalization, in the form of fleet reoptimization, affected prices following the US Airways/American Airlines merger. Prices of the merged firm increased 10% on routes typically served by US Airways relative to routes typically served by American Airlines, and by 12% relative to US Airways’ rivals’ prices. Price‐cost regressions confirm such price hikes were likely due to fleet reoptimization.

Madhu Viswanathan is an Associate Professor of Marketing at the Indian School of Business (ISB). Prior to joining ISB, he served as an Assistant Professor at University of Arizona.

Professor Viswanathan’s research work focuses on the role of distribution channels, B2B relationships, and salesforce compensation, as well as, their impact on key marketing mix elements such as pricing and product assortment. His work has been published in the Journal of Marketing Research, a premier journal in the field of marketing. He has consulted for and worked with companies spanning a wide range of industries including retail, insurance, and healthcare.

Professor Viswanathan holds a PhD in Business Administration (Marketing) from the University of Minnesota, Twin Cities, and an undergraduate degree in Mechanical Engineering from BITS, Pilani.

Madhu Viswanathan
Madhu Viswanathan