Does Product Differentiation Soften Price Reactions to Entry? Evidence from the Airline Industry

Cristian Huse () and Alessandro Oliveira

Journal of Transport Economics and Policy, 2012, vol. 46, issue 2, 189-204

Abstract: We examine the effects of entry on the pricing of legacy airlines facing a rapidly expanding low-cost newcomer. We estimate the timing and the determinants of responses allowing for asymmetry and product differentiation. We propose a decomposition procedure of time fixed-effects to control for unobserved heterogeneity, accounting for time-varying route-, city-, and carrier-specific unobservables. We find that incumbents do price-respond to actual but not to potential entry. The lack of preemption is due to financial distress, which precluded costly deterrence against a deep-pocketed newcomer. Our model also uncovers product differentiation stemming from more convenient flights. © 2012 LSE and the University of Bath

Date: 2012
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Citations: View citations in EconPapers (18)

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