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 Associate Professor of Marketing at the Indian School of Business (ISB) and Executive Director of the Srini Raju Centre for IT and the Networked Economy (SRITNE). His research examines how emerging technologies reshape markets and how firms, platforms, and policymakers can design institutions that foster innovation, trust, and sustainable economic growth.

Working at the intersection of marketing, economics, strategy, and information systems, his research seeks to understand how technological change transforms consumer behaviour, organizational incentives, market design, and public policy. He studies how technologies such as artificial intelligence, digital platforms, creator ecosystems, and data-driven decision systems influence the way markets function and evolve. Across these diverse settings, his work aims to develop insights that help organizations respond to technological change with strategies that are both economically effective and socially meaningful.

His research has been published in leading journals including the Journal of Marketing Research, Marketing Science, and the Journal of Economics & Management Strategy. He serves on the Editorial Review Boards of the Journal of Marketing Research and Production and Operations Management and has been recognized with the Outstanding Reviewer Award from the Journal of Marketing Research.

As Executive Director of SRITNE, Madhu leads the Centre’s research and engagement on artificial intelligence, digital markets, and technology-enabled growth. Under his leadership, SRITNE is building a multidisciplinary research agenda around AI, digital platforms, creator economies, and emerging technologies while strengthening collaborations across academia, industry, startups, and government. His vision is to position the Centre as a leading hub for research that bridges technological innovation with business strategy and public policy.

Alongside his research, he teaches MBA, doctoral, and executive education programmes on growth strategy, digital marketing, artificial intelligence, and technology-enabled business. His teaching combines rigorous research with practical decision frameworks that help managers navigate growth, digital transformation, and strategic decision-making in rapidly evolving markets.

Beyond academia, Madhu serves as an independent director and advisor to technology ventures, working with organizations on growth strategy, platform businesses, AI adoption, digital transformation, and technology-enabled market design. His advisory work reflects his broader commitment to translating rigorous academic research into practical solutions for business leaders, entrepreneurs, and policymakers.

Prior to joining ISB, he was on the faculty at the University of Arizona. He received his PhD in Marketing from the University of Minnesota and his undergraduate degree from BITS Pilani. His work seeks to bridge rigorous academic research with business practice and public policy, helping organizations harness emerging technologies to build more innovative, efficient, and inclusive markets.

Prof Madhu Viswanathan
Madhu Viswanathan