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Airport capacity and entry deterrence: Low cost versus full service airlines

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  • Valido, Jorge
  • Socorro, M. Pilar
  • Medda, Francesca

Abstract

We study entry deterrence in air transport markets with a full-service (FS) carrier (the incumbent) and a low-cost (LC) carrier (the potential entrant). We consider a vertically differentiated product model where airlines have different operating cost and different generalized prices so they compete in ticket prices and frequencies. Thus, more frequency allows airlines to increase ticket prices without losing demand. In this context, we show that the incumbent may increase the frequency offered in order to deter the LC carrier entry. We show that if the airport capacity is low enough the LC carrier entry can be easily blocked or deterred. However, if the airport capacity is sufficiently high, the LC carrier entry must be accommodated. Regulators should take these results into account in order to promote competition among airlines.

Suggested Citation

  • Valido, Jorge & Socorro, M. Pilar & Medda, Francesca, 2020. "Airport capacity and entry deterrence: Low cost versus full service airlines," Economics of Transportation, Elsevier, vol. 22(C).
    • Handle: RePEc:eee:ecotra:v:22:y:2020:i:c:s2212012219300796
    DOI: 10.1016/j.ecotra.2020.100165
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    More about this item

    Keywords

    Low-cost carriers; Full-service carriers; Entry deterrence; Airport capacity;
    All these keywords.

    JEL classification:

    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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