Effects of Southwest Airlines on Carrier Profits and Entry Probabilities

Junqiushi Ren

Mathematical Problems in Engineering, 2021, vol. 2021, 1-9

Abstract:

This paper studies the effects of Southwest Airlines, the largest low-cost carrier (LCC) in the U.S., on other carriers’ payoff functions and entry probabilities. A static entry game model is developed and estimated by viewing entry as an indicator of underlying profitability and making use of Nash Equilibrium. Results indicate that Southwest has a remarkable and negative impact on the payoffs of other carriers. This impact is firm-specific, with LCCs being more affected than full-service carriers (FSCs). Comparing the two service types, the results show that Southwest’s nonstop presence apparently imposes more downward pressure on opponents’ profits than its connecting presence. A counterfactual experiment is then conducted. Once Southwest is counterfactually removed, the probability of each carrier entering a market significantly changes. This paper examines Southwest’s impacts from a new perspective and extends literature on entry game estimation.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlmpe:6625584

DOI: 10.1155/2021/6625584

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