'Flying Under Radar': Southwest Airlines And Incumbents¡¯ Response To Entry

This paper investigates the competitive effect of Southwest Airlines, considering the factors affecting its decision to offer service in particular city-pairs and the effect of Southwest¡¯s presence on overall fares and the fare distribution of major airlines. Southwest is a formidable, apparently low-cost competitor when it is present it often garners a large share and creates significant fare pressure on major airlines. Despite this competitive success Southwest¡¯s network does not include service to many destinations, limiting its competitive effect. We investigate the factors affecting Southwest¡¯s decision to offer service, including the effect of Southwest on overall fares and the fare distribution of major airlines. We find that ¡®network efficiency¡¯ complementing inefficiency of hub-and-spoke network is one of the key factors explaining Southwest¡¯s selective entry and subsequent share. The ability of Southwest to offer more efficient network service then limits the markets where it operates. We also document empirical evidence that Southwest¡¯s presence decreases the fare dispersion of major airlines leading more fare reduction of high-valued customers rather than low-valued, price-sensitive customers. This results also support the hypothesis that ¡®network efficiency¡¯ is one of the key elements explaining Southwest¡¯s success.