How Firms Absorb Demand Side Shocks : Evidence from a Natural Experiment

We analyze impact of the freeway interchange collapse in San Francisco Bay area on difference in airfare quotes for travel into the area's three 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 than afterwards. We test our contention using the sample of fare quotes collected on-line, and find the expected effect in the magnitude of 6-7 percent. Our results imply the following conclusions. First, the demand-side shock was well absorbed by the supply side. Second, return to status quo once the shock vanished was swift