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Localized competitive advantage and price reactions to entry: Full-service vs. low-cost airlines in recently liberalized emerging markets

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  • Oliveira, Alessandro V.M.
  • Huse, Cristian

Abstract

This paper empirically investigates price reactions to the entry of the low-cost carrier Gol Airlines in the Brazilian domestic market in 2001. Given the substantial reduction in unconditional yields of the incumbent airlines on routes actually entered by Gol, we perform an econometric analysis of the determinants of pricing power along with the analysis of the pattern of price reactions by incumbent legacy carriers. Using data from a panel of routes disaggregated at the airline level, we obtain that (i) both airport and route presence are relevant at explaining pricing behavior; (ii) price responses vary significantly according to flight distance and the amount of seats supplied by the entrant, in the sense that the shorter the route, and the more the seats offered by the newcomer, the stronger the price reactions from the incumbents, with significant point estimates in the range 22-26% in yield reduction for routes as short as 350Â km (approx. 195 miles). More generally, the results shed light on the impacts of airline deregulation in emerging markets and the issue of localized competitive advantage due to product differentiation in the industry.

Suggested Citation

  • Oliveira, Alessandro V.M. & Huse, Cristian, 2009. "Localized competitive advantage and price reactions to entry: Full-service vs. low-cost airlines in recently liberalized emerging markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 45(2), pages 307-320, March.
  • Handle: RePEc:eee:transe:v:45:y:2009:i:2:p:307-320
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    Citations

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    Cited by:

    1. Hideki Murakami, 2009. "Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in US Large Air Markets," Discussion Papers 2009-25, Kobe University, Graduate School of Business Administration.
    2. Hideki Murakami, 2010. "Time Effect of Low-Cost Carrier Entry and Social Welfare in US Large Air Markets," Discussion Papers 2010-31, Kobe University, Graduate School of Business Administration.
    3. Ismail, Noor Azina & Jenatabadi, Hashem Salarzadeh, 2014. "The influence of firm age on the relationships of airline performance, economic situation and internal operation," Transportation Research Part A: Policy and Practice, Elsevier, vol. 67(C), pages 212-224.
    4. Fageda, Xavier, 2014. "What hurts the dominant airlines at hub airports?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 177-189.
    5. Wanke, Peter & Barros, C.P., 2016. "Efficiency in Latin American airlines: A two-stage approach combining Virtual Frontier Dynamic DEA and Simplex Regression," Journal of Air Transport Management, Elsevier, vol. 54(C), pages 93-103.
    6. repec:eee:jaitra:v:64:y:2017:i:pa:p:86-90 is not listed on IDEAS
    7. Zhang, Qiong & Yang, Hangjun & Wang, Qiang & Zhang, Anming, 2014. "Market power and its determinants in the Chinese airline industry," Transportation Research Part A: Policy and Practice, Elsevier, vol. 64(C), pages 1-13.
    8. Hideki Murakami, 2012. "Dynamic Effect of Low-Cost Entry on the Conduct Parameter: An Early-Stage Analysis of Southwest Airlines and America West Airlines," Discussion Papers 2012-25, Kobe University, Graduate School of Business Administration.
    9. Resul Aydemir & Cihad Haytural, 2016. "The effects of low cost carrier entry in the Turkish Airline industry," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(1), pages 111-124, April.
    10. Vinayak Deshpande & Mazhar Arıkan, 2012. "The Impact of Airline Flight Schedules on Flight Delays," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 423-440, July.
    11. Murakami, Hideki & Amano, Yoshihisa & Asahi, Ryota, 2015. "Dynamic effect of inter-firm rivalry on airfares: Case of Japan's full-service and new air carriers," Journal of Air Transport Management, Elsevier, vol. 44, pages 25-33.
    12. Moreno-Izquierdo, L. & Ramón-Rodríguez, A. & Perles Ribes, J., 2015. "The impact of the internet on the pricing strategies of the European low cost airlines," European Journal of Operational Research, Elsevier, vol. 246(2), pages 651-660.
    13. Hideki Murakami & Yoshihisa Amano, 2013. "Dynamic effect of inter-airline rivalry on airfares and consumers' welfare: Japan' s full-service vs. new air carriers," Discussion Papers 2013-31, Kobe University, Graduate School of Business Administration.
    14. Varella, Rafael R. & Frazão, Jessica & Oliveira, Alessandro V.M., 2017. "Dynamic pricing and market segmentation responses to low-cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 151-170.
    15. Bernardo, Valeria & Fageda, Xavier, 2017. "The effects of the Morocco-European Union open skies agreement: A difference-in-differences analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 24-41.
    16. repec:eee:transa:v:106:y:2017:i:c:p:288-299 is not listed on IDEAS

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