'FLYING UNDER RADAR': SOUTHWEST AIRLINES AND INCUMBENTS¡¯ RESPONSE TO ENTRY

Junbyoung Oh ()

Journal of Economic Development, 2006, vol. 31, issue 1, 149-171

Abstract: 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.

Keywords: Network Efficiency; Entry; Incumbent¡¯s Response; Price Dispersion (search for similar items in EconPapers)
JEL-codes: L1 L9 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:jed:journl:v:31:y:2006:i:1:p:149-171

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