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

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Author Info
Austan Goolsbee
Chad Syverson

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11072.

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Date of creation: Jan 2005
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Handle: RePEc:nbr:nberwo:11072

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L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  5. Reiss, Peter C & Spiller, Pablo T, 1989. "Competition and Entry in Small Airline Markets," Journal of Law & Economics, University of Chicago Press, vol. 32(2), pages S179-202, October.
  6. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen. [Downloadable!] (restricted)
  7. Michael D. Whinston & Scott C. Collins, 1992. "Entry and Competitive Structure in Deregulated Airline Markets: An Event Study Analysis of People Express," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 445-462, Winter. [Downloadable!] (restricted)
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  9. Bailey, Elizabeth E, 1981. "Contestability and the Design of Regulatory and Antitrust Policy," American Economic Review, American Economic Association, vol. 71(2), pages 178-83, May. [Downloadable!] (restricted)
  10. Borenstein, Severin, 1991. "The Dominant-Firm Advantage in Multiproduct Industries: Evidence from the U.S. Airlines," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1237-66, November. [Downloadable!] (restricted)
  11. Gustavo E. Bamberger & Dennis W. Carlton & Lynette R. Neumann, 2001. "An Empirical Investigation of the Competitive Effects of Domestic Airline Alliances," NBER Working Papers 8197, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring. [Downloadable!] (restricted)
  13. Severin Borenstein, 1989. "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 344-365, Autumn. [Downloadable!] (restricted)
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    Other versions:
  15. Robert D. Cairns & John W. Galbraith, 1990. "Artificial Compatibility, Barriers to Entry, and Frequent-Flyer Programs," Canadian Journal of Economics, Canadian Economics Association, vol. 23(4), pages 807-16, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Robert Seamans, 2008. "Pricing and Multi-Market Contact in the Cable TV Industry," Working Papers 08-13, NET Institute, revised Oct 2008. [Downloadable!]
  2. Kris Gerardi & Adam Hale Shapiro, 2007. "The effects of competition on price dispersion in the airline industry: a panel analysis," Working Papers 07-7, Federal Reserve Bank of Boston. [Downloadable!]
  3. Steven Berry & Panle Jia, 2008. "Tracing the Woes: An Empirical Analysis of the Airline Industry," NBER Working Papers 14503, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Loreto Lira & Rosario Rivero & Rodrigo Vergara, 2005. "Entry and Prices: Evidence from the Chilean Supermarket Industry," Documentos de Trabajo 299, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  5. Yongmin Chen & Scott J. Savage, 2007. "The Effects Of Competition On The Price For Cable Modem Internet Access," Working Papers 07-13, NET Institute, revised Sep 2007. [Downloadable!]
  6. Glenn Ellison & Sara Fisher Ellison, 2007. "Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration," NBER Working Papers 13069, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Jon Strand & Michael Keen, 2006. "Indirect Taxes on International Aviation," IMF Working Papers 06/124, International Monetary Fund. [Downloadable!]
    Other versions:
  8. Maria José Gil-Moltó & Claudio A. Piga, 2007. "Entry and Exit in a Liberalised Market," Rivista di Politica Economica, SIPI Spa, vol. 97(1), pages 3-38, January-F. [Downloadable!]
    Other versions:
  9. Margaret K. Kyle, 2007. "Strategic Responses to Parallel Trade," NBER Working Papers 12968, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Casey B. Mulligan & Kevin K. Tsui, 2008. "Political Entry, Public Policies, and the Economy," NBER Working Papers 13830, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Claudio Agostini, 2005. "El Mercado de Transporte Aéreo: Lecciones para Chile de una Revisión de la Literatura," ILADES-Georgetown University Working Papers inv163, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  12. Paul W. Dobson & Claudio A. Piga, 2009. "Mergers and Business Model Assimilation: Evidence from Low-Cost Airlines Takeovers," Discussion Paper Series 2009_2, Department of Economics, Loughborough University, revised Feb 2009. [Downloadable!]
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