Sensitivity of prices to demand shocks: A natural experiment in the San Francisco Bay Area

We analyze the impact of a freeway interchange collapse in the San Francisco Bay Area on the difference in airfare quotes for travel into the area's main airports. The incident temporarily made Oakland airport a less attractive choice for traveling to San Francisco, so we hypothesize that fares for travel into Oakland will be relatively lower while the freeway interchange was out of service. We test our contention using a sample of fare quotes collected on-line, and find the expected effect of a magnitude of 6-7%. Our results imply the following important conclusions. First, the demand-side shock was well absorbed by the supply side. Second, adjustment of prices and return to the status quo once the shock vanished was swift. (C) 2012 Elsevier Ltd. All rights reserved.