Munich Personal RePEc Archive

A Re-examination of Incumbents’ Response to the Threat of Entry: Evidence from the Airline Industry

Gayle, Philip and Wu, Chi-Yin (2012): A Re-examination of Incumbents’ Response to the Threat of Entry: Evidence from the Airline Industry. Forthcoming in: Economics of Transportation

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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”.

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