Entry and Market Dynamics: The Impact of Low-Cost Carriers in China

Abstract

This paper examines the impact of low-cost carriers (LCCs) on the pricing strategies of full-service carriers (FSCs) in the Chinese airline market. We first analyze the effect of LCC presence and find that LCCs exert significant downward pressure on FSC fares, with the magnitude of this impact varying across carriers and routes. Next, we explore the dynamic responses of incumbent FSCs to the entry and the threat of entry by LCCs. Our findings reveal that FSCs begin lowering fares well in advance of LCC entry, with fare reductions of approximately 11%–18% occurring as early as the 8th quarter before entry. The fare reductions intensify as the entry date approaches and persist beyond it. On the other hand, FSCs do not seem to respond to LCC entry threats. Our analysis highlights the importance of considering the dynamic pricing responses of FSCs rather than relying solely on LCC presence which is commonly used in the literature studying Chinese LCCs.

Keywords: Low-cost carriers, Entry and Entry threats, Market Dynamics, Chinese airline market JEL Classification Codes: D43, L13, L93