Competition and Firm Service Reliability Decisions: A Study of the Airline Industry

75 Pages Posted: 21 Mar 2016 Last revised: 7 Jul 2020

See all articles by Chen Zhou

Chen Zhou

University of South Carolina

Paulo Albuquerque

INSEAD

Rajdeep Grewal

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: February 20, 2018

Abstract

To understand the impact of competition on organizational service reliability decisions, this study investigates if firms in the airline industry consider competitors’ actions when making their service reliability decisions. Using data from the U.S. Bureau of Transportation Statistics on flight cancellation rates and average length of flight delays, the authors use two complementary approaches, a simultaneous equation model and a discrete game framework, to examine competitive influence on firm decisions on the level of service reliability. The authors find that competitive effects are asymmetric and differ by the type of firm and its competitors – full-service vs. low-cost airlines – as well by level of market concentration. The authors show that internal initiatives, such as on-time bonuses, can substantially improve service reliability, but require the firm to account for competitive reactions. Ignoring competitive effects leads to an over-estimation of the impact of these programs on service reliability levels.

Keywords: Airline industry, cancellation rates, competition, flight delays, simultaneous discrete game, simultaneous equation model, service reliability

Suggested Citation

Zhou, Chen and Albuquerque, Paulo and Grewal, Rajdeep, Competition and Firm Service Reliability Decisions: A Study of the Airline Industry (February 20, 2018). INSEAD Working Paper No. 2016/18/MKT, Available at SSRN: https://ssrn.com/abstract=2749622 or http://dx.doi.org/10.2139/ssrn.2749622

Chen Zhou

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

Paulo Albuquerque (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Rajdeep Grewal

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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