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Low-cost fare response to new entry

Author

Listed:
  • Paolo Malighetti
  • Stefano Paleari
  • Renato Redondi

Abstract

This study analyzes easyJet's fare response to new entry. Traditionally, this stream of literature has focused on the reactions of network carriers to competition from low-cost carriers. As low-cost services spread, however, the number of low-cost incumbents is rising. This paper aims to shed light on low-cost price behaviour in the European context. The analysis is based on an original dataset composed of all fares offered by easyJet up to 90 days before departure, on all flights during the period 2007-2009. We focus on short-term price reactions by employing the event study methodology. We decompose the price response into three terms: the average fare, dynamic pricing, and fare dispersion around the predicted price curve. Our results show that easyJet's temporal price discrimination tends to decrease after a new entry, especially when the new entrant is a traditional carrier. There is also some evidence for an average fare reduction of about 3%.

Suggested Citation

  • Paolo Malighetti & Stefano Paleari & Renato Redondi, 2010. "Low-cost fare response to new entry," Working Papers 1010, Department of Management, Information and Production Engineering, University of Bergamo.
    • Handle: RePEc:brh:wpaper:1010
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    File URL: http://hdl.handle.net/10446/751
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