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A re-examination of incumbents’ response to the threat of entry: Evidence from the airline industry

Philip Gayle () and Chi-Yin Wu

Economics of Transportation, 2013, vol. 2, issue 4, 119-130

Abstract: Much of the literature on the airline industry identifies a potential entrant to a market based on whether the relevant carrier has presence in at least one of the endpoint airports of the market without actually operating between the endpoints. Furthermore, a potential entrant is often defined as a credible “entry threat” to market incumbents once the potential entrant establishes presence at the second endpoint airport of the market. This paper provides evidence that even when a potential entrant has presence at both endpoint airports of a market, incumbents may not respond to this as an effective “entry threat”. Specifically, we find that (1) incumbents lower price by more when the potential entrant has a hub at one or both market endpoints; and (2) incumbents increase rather than lower their price if they have an alliance partnership with the “potential entrant”.

Keywords: Empirical entry model; Airline competition (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.ecotra.2014.01.001

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