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Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines’ On-Time Performance

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  • Jeffrey T. Prince

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • Daniel H. Simon

    (School of Public and Economic Affairs, Indiana University)

Abstract

We examine if and how incumbent firms respond to entry, and entry threats, using non-price modes of competition. Our analysis focuses on service quality within the airline industry. We find that incumbent on-time performance actually worsens in response to entry, and even entry threats, by Southwest Airlines. Given Southwest’s general superiority in on-time performance, this result is consistent with equilibria of theoretical models of quality and price competition, which generally predict differentiation along quality. We corroborate this intuition with further analysis, showing there is no notable response by incumbents when an airline with average on-time performance (Continental) threatens to enter or enters a route.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2010-15-prince-simon.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2010-15.

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Date of creation: Sep 2010
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Handle: RePEc:iuk:wpaper:2010-15

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  1. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
  2. BEN-AKIVA, Moshe & DE PALMA, André & THISSE, Jacques-François, . "Spatial competition with differentiated products," CORE Discussion Papers RP -845, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Chen, Yongmin & Gayle, Philip, 2013. "Mergers and Product Quality: Evidence from the Airline Industry," MPRA Paper 51238, University Library of Munich, Germany.

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