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Airport capacity and entry deterrence: Low cost versus full service airlines

Jorge Valido, M. Pilar Socorro and Francesca Medda

Economics of Transportation, 2020, vol. 22, issue C

Abstract: We study entry deterrence in air transport markets with a full-service (FS) carrier (the incumbent) and a low-cost (LC) carrier (the potential entrant). We consider a vertically differentiated product model where airlines have different operating cost and different generalized prices so they compete in ticket prices and frequencies. Thus, more frequency allows airlines to increase ticket prices without losing demand. In this context, we show that the incumbent may increase the frequency offered in order to deter the LC carrier entry. We show that if the airport capacity is low enough the LC carrier entry can be easily blocked or deterred. However, if the airport capacity is sufficiently high, the LC carrier entry must be accommodated. Regulators should take these results into account in order to promote competition among airlines.

Keywords: Low-cost carriers; Full-service carriers; Entry deterrence; Airport capacity (search for similar items in EconPapers)
JEL-codes: L12 L15 L93 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecotra:v:22:y:2020:i:c:s2212012219300796

DOI: 10.1016/j.ecotra.2020.100165

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