How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w11072
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.
Number of Pages in PDF File: 32
Date posted: February 17, 2005