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Incumbent responses to low-cost airline entry and exit: A spatial autoregressive panel data analysis

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  • Daraban, Bogdan
  • Fournier, Gary M.

Abstract

While the US airline industry has been substantially transformed in recent years by the growth of low-cost airlines, the cost-saving benefits of lower airfares are difficult to gauge empirically. There are two important ways in which this paper contributes to the existing literature on the impact of the low-cost carriers (LCCs). First, the availability of route-level panel data allows us to examine the role of the LCCs in the long-run adjustment of airfares as well as the responses of the incumbent carriers to LCC entry and exit in a dynamic setting. Second, we capitalize on recent developments in spatial econometrics and explicitly model the spatial dependence among adjacent airline routes, an issue often ignored by previous studies. Although most of the pro-competitive effects of LCC entry take place after entry, we find evidence that the incumbent carriers also cut airfares in anticipation of entry by the LCCs. Moreover fares remain lower even after Southwest Airlines exits. Our empirical analysis confirms the spatial dependence among airfares in adjacent routes, provides estimates of the consumer benefits from lower airfares in routes affected by LCCs, and shows that there are substantial indirect benefits, i.e. lower fares in spatially-linked, nearby routes.

Suggested Citation

  • Daraban, Bogdan & Fournier, Gary M., 2008. "Incumbent responses to low-cost airline entry and exit: A spatial autoregressive panel data analysis," Research in Transportation Economics, Elsevier, vol. 24(1), pages 15-24.
  • Handle: RePEc:eee:retrec:v:24:y:2008:i:1:p:15-24
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    References listed on IDEAS

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    1. Franzese, Robert J. & Hays, Jude C., 2007. "Spatial Econometric Models of Cross-Sectional Interdependence in Political Science Panel and Time-Series-Cross-Section Data," Political Analysis, Cambridge University Press, vol. 15(02), pages 140-164, March.
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    3. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers 2003-22, Brown University, Department of Economics.
    4. Gary M. Fournier & Monica E. Hartmann & Thomas Zuehlke, 2005. "Airport Substitution by Travelers: Why do we have to drive to fly?," Working Papers wp2005_09_01, Department of Economics, Florida State University.
    5. Windle, Robert & Dresner, Martin, 1999. "Competitive responses to low cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 35(1), pages 59-75, March.
    6. Michael D. Whinston & Scott C. Collins, 1992. "Entry and Competitive Structure in Deregulated Airline Markets: An Event Study Analysis of People Express," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 445-462, Winter.
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    Citations

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    Cited by:

    1. Kai Huschelrath & Kathrin Muller, 2014. "The Value Of Bluer Skies. – How Much Do Consumers Gain From Entry By Jetblue Airways In Long-Haul U.S. Airline Markets?," Articles, International Journal of Transport Economics, vol. 41(1).
    2. Hüschelrath, Kai & Müller, Kathrin, 2012. "The competitive effects of firm exit: Evidence from the US airline industry," ZEW Discussion Papers 12-037, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Hüschelrath, Kai & Müller, Kathrin, 2013. "The competitive effects of firm exit," Economics of Transportation, Elsevier, vol. 2(2), pages 72-85.
    4. Ofelia Betancor & Juan Luis Jiménez, 2011. "When trains go faster than planes: the strategic reaction of airlines in Spain," ERSA conference papers ersa11p295, European Regional Science Association.
    5. Kai Hüschelrath & Kathrin Müller, 2013. "Patterns and Effects of Entry in U.S. Airline Markets," Journal of Industry, Competition and Trade, Springer, vol. 13(2), pages 221-253, June.
    6. Gayle, Philip & Xie, Xin, 2017. "Entry Deterrence and Strategic Alliances," MPRA Paper 83233, University Library of Munich, Germany.
    7. repec:eee:transb:v:104:y:2017:i:c:p:317-336 is not listed on IDEAS
    8. Agustin Ros, 2011. "The Determinants of Pricing in the Mexican Domestic Airline Sector: The Impact of Competition and Airport Congestion," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(1), pages 43-60, January.
    9. Cruz Rodríguez Ignacio J., 2012. "Aerolíneas de bajo costo en México Competencia modal, intermodal e intramodal," Contaduría y Administración, Accounting and Management, vol. 57(4), pages 235-251, octubre-d.
    10. Diana, Tony, 2010. "Predicting Arrival Delays: An Application of Spatial Analysis," 51st Annual Transportation Research Forum, Arlington, Virginia, March 11-13, 2010 207260, Transportation Research Forum.

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