Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines' On-Time Performance
Indiana University - Kelley School of Business - Department of Business Economics & Public Policy
Daniel H. Simon
Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)
Indiana University School of Public & Environmental Affairs Research Paper No. 2010-09-01
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 cost-cutting strategy that allows for intense post-entry price competition along with pre-entry deterrence, or it may be due to a post-entry differentiation strategy along with pre-entry accommodation. Further analysis of entry and entry threats by other airlines is inconclusive, providing evidence that is partially consistent with both hypotheses. Nonetheless, the phenomenon of worsening OTP can only be observed when the (potential) entrant is a LCC (Southwest, Jet Blue, and AirTran).
Number of Pages in PDF File: 38
Keywords: On-time performance, airlines, quality competition, entry, entry threat, Southwest
JEL Classification: L10, L93, D21
Date posted: September 2, 2010 ; Last revised: May 13, 2014
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