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A re-examination of incumbents’ response to the threat of entry: Evidence from the airline industry

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  • Gayle, Philip G.
  • Wu, Chi-Yin

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”.

Suggested Citation

  • Gayle, Philip G. & Wu, Chi-Yin, 2013. "A re-examination of incumbents’ response to the threat of entry: Evidence from the airline industry," Economics of Transportation, Elsevier, vol. 2(4), pages 119-130.
  • Handle: RePEc:eee:ecotra:v:2:y:2013:i:4:p:119-130
    DOI: 10.1016/j.ecotra.2014.01.001
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    4. Gayle, Philip & Lin, Ying, 2020. "Cost Pass-through in Commercial Aviation: Theory and Evidence," MPRA Paper 102018, University Library of Munich, Germany.
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    8. Jan K. Brueckner & Darin N. Lee & Pierre M. Picard & Ethan Singer, 2015. "Product Unbundling in the Travel Industry: The Economics of Airline Bag Fees," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 457-484, September.
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    10. Philip G. Gayle & Xin Xie, 2018. "Entry Deterrence And Strategic Alliances," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1898-1924, July.
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    More about this item

    Keywords

    Empirical entry model; Airline competition;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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