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

NBER Working Paper No. 11072
Issued in January 2005
NBER Program(s): IO

---- 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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This paper was revised on August 13, 2008

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