Entry, Contestability, and Deregulated Airline Markets: an Event Study Analysis of People Express

49 Pages Posted: 27 Apr 2000 Last revised: 28 Jul 2022

See all articles by Michael D. Whinston

Michael D. Whinston

Sloan School of Management and Department of Economics

Scott C. Collins

Summit Partners, London

Date Written: April 1990

Abstract

A number of recent papers have studied the relationship between price and market structure in the deregulated airline industry through a cross-sectional analysis of city-pair markets. Yet, while interesting, several potential difficulties underlie the inferences drawn in these analyses. In this paper, we consider an alternative approach that uses stock price reactions to entry announcements to shed light on the nature of competitive behavior in this industry. The analysis sheds light on three issues. First, it offers a clean test of contestable market theory. Second, it provides evidence on the level of profits or sunk costs present in these markets. Third, it sheds light on the degree of competitive "localization" existing in the industry. The particular entry events that we focus on are those involving People Express Airline in 1984 and 1985. To provide a more complete picture of the effects of these entry events, we also examine the price and quantity changes that occurred following entry.

Suggested Citation

Whinston, Michael D. and Collins, Scott C., Entry, Contestability, and Deregulated Airline Markets: an Event Study Analysis of People Express (April 1990). NBER Working Paper No. w3318, Available at SSRN: https://ssrn.com/abstract=226663

Michael D. Whinston (Contact Author)

Sloan School of Management and Department of Economics ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Scott C. Collins

Summit Partners, London ( email )

8 Clifford Street
London, W1S 2LQ
United Kingdom

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