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Localized competitive advantage and price reactions to entry: Full-service vs. low-cost airlines in recently liberalized emerging markets

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  • Oliveira, Alessandro V.M.
  • Huse, Cristian

Abstract

This paper empirically investigates price reactions to the entry of the low-cost carrier Gol Airlines in the Brazilian domestic market in 2001. Given the substantial reduction in unconditional yields of the incumbent airlines on routes actually entered by Gol, we perform an econometric analysis of the determinants of pricing power along with the analysis of the pattern of price reactions by incumbent legacy carriers. Using data from a panel of routes disaggregated at the airline level, we obtain that (i) both airport and route presence are relevant at explaining pricing behavior; (ii) price responses vary significantly according to flight distance and the amount of seats supplied by the entrant, in the sense that the shorter the route, and the more the seats offered by the newcomer, the stronger the price reactions from the incumbents, with significant point estimates in the range 22-26% in yield reduction for routes as short as 350Â km (approx. 195 miles). More generally, the results shed light on the impacts of airline deregulation in emerging markets and the issue of localized competitive advantage due to product differentiation in the industry.

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Bibliographic Info

Article provided by Elsevier in its journal Transportation Research Part E: Logistics and Transportation Review.

Volume (Year): 45 (2009)
Issue (Month): 2 (March)
Pages: 307-320

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Handle: RePEc:eee:transe:v:45:y:2009:i:2:p:307-320

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Keywords: Industrial organization Entry Low-cost carrier Price reactions;

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Cited by:
  1. Xavier Fageda, 2014. "“What hurts the dominant airlines at hub airports?”," IREA Working Papers 201414, University of Barcelona, Research Institute of Applied Economics, revised May 2014.
  2. Zhang, Qiong & Yang, Hangjun & Wang, Qiang & Zhang, Anming, 2014. "Market power and its determinants in the Chinese airline industry," Transportation Research Part A: Policy and Practice, Elsevier, vol. 64(C), pages 1-13.
  3. Hideki Murakami, 2012. "Dynamic Effect of Low-Cost Entry on the Conduct Parameter: An Early-Stage Analysis of Southwest Airlines and America West Airlines," Discussion Papers 2012-25, Kobe University, Graduate School of Business Administration.

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