Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines' On-Time Performance

Abstract:     
We examine if and how incumbent firms respond to entry and entry threats using non-price modes of competition. Our analysis focuses on airline service quality. We find that incumbent on-time performance (OTP) actually worsens in response to entry, and even entry threats, by Southwest Airlines. Since Southwest is both a top-performing airline in OTP and a low-cost carrier (LCC), we conjecture that this response by incumbents may be due to a post-entry differentiation strategy along with pre-entry accommodation, or it may be due to a cost-cutting strategy that allows for intense post-entry price competition along with pre-entry deterrence. Further analysis of entry and entry threats by other airlines shows that worsening OTP only occurs in response to Southwest, Jet Blue, and AirTran – all three being low-cost carriers. This additional finding suggests that worsening in OTP by incumbents is part of the latter, cost-cutting strategy.

Number of Pages in PDF File: 37

Keywords: On-time performance, airlines, quality competition, entry, entry threat, Southwest

JEL Classification: L10, L93, D21

working papers series