How Do Incumbents Respond to the Threat of Entry on Their Networks? Evidence from the Major Airlines
NET Institute Working Paper No. 04-04
32 Pages Posted: 14 Nov 2004
Date Written: October 2004
Abstract
This paper examines how incumbents respond to the threat of entry of competitors, as distinguished from their response to competitors' actual entry. It uses a case study from the passenger airline industry specifically, the evolution of Southwest Airlines' route network - to identify particular routes where the probability of future entry rises abruptly. When Southwest begins operating in airports on both sides of a route but not the route itself, this dramatically raises the chance they will start flying that route in the near future. We examine the pricing of the incumbents on threatened routes in the period surrounding such events. We find that incumbents cut fares significantly when threatened by Southwest's entry into their routes. This is true even after controlling in several ways for airport-specific operating costs. The response of incumbents seems to be limited only to the threatened route itself, and not to routes out of nearby competitor airports where Southwest does not operate (e.g., fares drop on routes from Chicago Midway but not Chicago O'Hare). The largest responses appear to be restricted to routes that were concentrated beforehand. Incumbents do experience short-run increases in their passenger loads concurrent with these fare cuts. This is consistent with theories implying incumbents will try to generate some longer-term loyalty among current customers before the entry of a new competitor. We examine evidence relating this demand-building motive to frequent flyer programs and find suggestive evidence in favor of this notion. There is only weak evidence that incumbents increase capacity on the routes.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration
By Glenn Ellison and Sara Fisher Ellison
-
How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines
By Austan Goolsbee and Chad Syverson
-
Entry, Contestability, and Deregulated Airline Markets: an Event Study Analysis of People Express
-
Implementing and Interpreting Event Studies of Regulatory Changes
-
Indirect Taxes on International Aviation
By Michael Keen and Jon Strand
-
Low Cost Carrier Growth in the U.S. Airline Industry: Past, Present, and Future
By Harumi Ito and Darin Lee
-
By Abraham Dunn
-
The Effect of the Investment Tax Credit on the Value of the Firm
-
The Effects of Competition on Price Dispersion in the Airline Industry: A Panel Analysis