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

38 Pages Posted: 2 Sep 2010 Last revised: 13 May 2014

Jeffrey Prince

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Daniel H. Simon

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Date Written: October 2013

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 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).

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

JEL Classification: L10, L93, D21

Suggested Citation

Prince, Jeffrey and Simon, Daniel H., Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines' On-Time Performance (October 2013). Indiana University School of Public & Environmental Affairs Research Paper No. 2010-09-01. Available at SSRN: https://ssrn.com/abstract=1670203 or http://dx.doi.org/10.2139/ssrn.1670203

Jeffrey Prince (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Daniel H. Simon

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

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