Monday, August 23, 2010

Profit Margin Presistence

Blog readers may be interested in reading Denton Collins et al.'s An Empirical Investigation of the Relationship Between Profit Margin Presistence and Firms' Choice of Business Model: Evidence From the US Airline Industry (Working Paper Aug. 19, 2010) (available from SSRN here).  From the abstract:

This paper examines the influence of a firm’s business model on the relative persistence of profit margins in the U.S. airline industry. A firm’s business model reflects how that firm chooses to compete in the marketplace. Prior research conjectures that profit margin persistence is influenced by, among other things, competitive forces in the marketplace. We test this conjecture by (1) partitioning our sample firms according to business model (network carriers versus low-cost carriers), and (2) decomposing sample firms’ profit margins into components relating to pricing policy, input cost control, and productivity. While low-cost carriers are, on average, more profitable than their network carrier counterparts, we find that the margins of network carriers tend to be more persistent than those of low-cost carriers. This supports our hypothesis that business model influences the relative persistence of margins. Additional analyses suggest that, after controlling for innovations in growth, these differences arise because of both favorable and unfavorable pricing and productivity innovations.

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