Product Quality Choices and Competition: Evidence from the U.S. Airline Industry
42 Pages Posted: 15 Sep 2016 Last revised: 23 Mar 2018
Date Written: March 19, 2018
This paper examines how network carriers adjust product quality given the competition from a low cost carrier (LCC). While previous research has shown that product quality (measured by on-time performance) suffers from heightened competition by LCC (Prince and Simon, 2015), our results find the contrary. Network carriers differentiate themselves by offering higher product quality through lower seat density and more first class/business class seating. Network carrier’s product quality response to other LCCs depends on market overlap. When considerable overlap exists, network carriers offer higher product quality by reducing seating density and/or increasing the proportion of first class/business class seats.
Keywords: Quality Competition, Airlines, Low Cost Carriers
JEL Classification: L13, L93
Suggested Citation: Suggested Citation