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'Flying Under Radar': Southwest Airlines And Incumbents¡¯ Response To Entry

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  • Jun-Byoung Oh

    () (Inha University)

Abstract

This paper investigates the competitive effect of Southwest Airlines, considering the factors affecting its decision to offer service in particular city-pairs and the effect of Southwest¡¯s presence on overall fares and the fare distribution of major airlines. Southwest is a formidable, apparently low-cost competitor when it is present it often garners a large share and creates significant fare pressure on major airlines. Despite this competitive success Southwest¡¯s network does not include service to many destinations, limiting its competitive effect. We investigate the factors affecting Southwest¡¯s decision to offer service, including the effect of Southwest on overall fares and the fare distribution of major airlines. We find that ¡®network efficiency¡¯ complementing inefficiency of hub-and-spoke network is one of the key factors explaining Southwest¡¯s selective entry and subsequent share. The ability of Southwest to offer more efficient network service then limits the markets where it operates. We also document empirical evidence that Southwest¡¯s presence decreases the fare dispersion of major airlines leading more fare reduction of high-valued customers rather than low-valued, price-sensitive customers. This results also support the hypothesis that ¡®network efficiency¡¯ is one of the key elements explaining Southwest¡¯s success.

Suggested Citation

  • Jun-Byoung Oh, 2006. "'Flying Under Radar': Southwest Airlines And Incumbents¡¯ Response To Entry," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 31(1), pages 149-171, June.
  • Handle: RePEc:jed:journl:v:31:y:2006:i:1:p:149-171
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    References listed on IDEAS

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    1. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
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    More about this item

    Keywords

    Network Efficiency; Entry; Incumbent¡¯s Response; Price Dispersion;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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