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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

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Daniel H. Simon

    (School of Public and Environmental Affairs, Indiana University, Bloomington, Indiana 47405)

Abstract

We examine if and how incumbent firms respond to entry and entry threats using nonprice modes of competition. Our analysis focuses on airline service quality. We find that incumbent on-time performance (OTP) actually worsens in response to entry, and even entry threats, by Southwest Airlines. Since Southwest is both a top-performing airline in OTP and a low-cost carrier (LCC), we conjecture that this response by incumbents may be due to a cost-cutting strategy that allows for intense postentry price competition along with preentry deterrence, or it may be due to a postentry differentiation strategy along with preentry accommodation. Further analysis of entry and entry threats by other airlines is inconclusive, providing evidence that is partially consistent with both hypotheses. Nonetheless, the phenomenon of worsening OTP can only be observed when the (potential) entrant is a LCC (Southwest, Jet Blue, and AirTran).Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1918 . This paper was accepted by by Bruno Cassiman, business strategy .

Suggested Citation

  • Jeffrey T. Prince & Daniel H. Simon, 2015. "Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines' On-Time Performance," Management Science, INFORMS, vol. 61(2), pages 372-390, February.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:2:p:372-390
    DOI: 10.1287/mnsc.2014.1918
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    More about this item

    Keywords

    on-time performance; airlines; quality competition; entry; entry threat;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General

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