How do incumbents respond to the threat of entry?
Subtitle: evidence from the major airlines
By: Austan Goolsbee, Chad Syverson.
Contributors: Syverson, Chad.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11072; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11072.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Southwest Airlines Co. -- Case studies.; Competition -- Mathematical models.; Airlines -- Mathematical models.
Description: "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%u2019s 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%u2019Hare).  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"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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