How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines

32 Pages Posted: 17 Feb 2005  

Austan Goolsbee

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Chad Syverson

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: January 2005

Abstract

We examine how incumbents respond to the threat of entry by competitors (as distinct from how they respond to actual entry). We look specifically at passenger airlines, using the evolution of Southwest Airlines' route network to identify particular routes where the probability of future entry rises abruptly. We find incumbents cut fares significantly when threatened by Southwest's entry. Over half of Southwest's total impact on incumbent fares occurs before Southwest starts flying. These cuts are only on threatened routes, not those out of non-Southwest competing airports. The evidence on whether incumbents are seeking to deter or accommodate entry is mixed.

Suggested Citation

Goolsbee, Austan and Syverson, Chad, How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines (January 2005). NBER Working Paper No. w11072. Available at SSRN: https://ssrn.com/abstract=653003

Austan Goolsbee (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Chad Syverson

University of Chicago Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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