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Does Product Differentiation Soften Price Reactions to Entry? Evidence from the Airline Industry

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  • Cristian Huse
  • Alessandro V. M. Oliveira

Abstract

We examine the effects of entry on the pricing of legacy airlines facing a rapidly expanding low-cost newcomer. We estimate the timing and the determinants of responses allowing for asymmetry and product differentiation. We propose a decomposition procedure of time fixed-effects to control for unobserved heterogeneity, accounting for time-varying route-, city-, and carrier-specific unobservables. We find that incumbents do price-respond to actual but not to potential entry. The lack of preemption is due to financial distress, which precluded costly deterrence against a deep-pocketed newcomer. Our model also uncovers product differentiation stemming from more convenient flights. © 2012 LSE and the University of Bath

Suggested Citation

  • Cristian Huse & Alessandro V. M. Oliveira, 2012. "Does Product Differentiation Soften Price Reactions to Entry? Evidence from the Airline Industry," Journal of Transport Economics and Policy, University of Bath, vol. 46(2), pages 189-204, May.
    • Handle: RePEc:tpe:jtecpo:v:46:y:2012:i:2:p:189-204
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    Cited by:

    1. Valido, Jorge & Socorro, M. Pilar & Medda, Francesca, 2020. "Airport capacity and entry deterrence: Low cost versus full service airlines," Economics of Transportation, Elsevier, vol. 22(C).
    2. 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.
    3. Chi‐Hyon Lee & Manuela N. Hoehn‐Weiss & Samina Karim, 2021. "Competing both ways: How combining Porter's low‐cost and focus strategies hurts firm performance," Strategic Management Journal, Wiley Blackwell, vol. 42(12), pages 2218-2244, December.
    4. Bettini, Humberto F.A.J. & Silveira, José Maria F.J. & Oliveira, Alessandro V.M., 2018. "Estimating strategic responses to the march of a low cost carrier to primary airports," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 109(C), pages 190-204.
    5. 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.
    6. Bauner, Christoph & Liu, Zexuan, 2022. "Incumbents’ pricing and nonpricing responses to entry in vertically differentiated markets," Journal of Air Transport Management, Elsevier, vol. 105(C).
    7. Asahi, Ryota & Murakami, Hideki, 2017. "Effects of Southwest Airlines' entry and airport dominance," Journal of Air Transport Management, Elsevier, vol. 64(PA), pages 86-90.
    8. Koopmans, Carl & Lieshout, Rogier, 2016. "Airline cost changes: To what extent are they passed through to the passenger?," Journal of Air Transport Management, Elsevier, vol. 53(C), pages 1-11.
    9. Borsati, Mattia & Fageda, Xavier, 2024. "Airline price responses in the face of demand shocks: European lessons from the COVID-19 pandemic," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 186(C).
    10. Kuljanin, Jovana & Kalić, Milica & Begović, Boris & Mijović, Nemanja & Renold, Manuel, 2021. "The effect of LCC market entry on dominant FSC's price into long haul sector: A case of Norwegian competition on British Airways' prices on selected transatlantic routes," Journal of Air Transport Management, Elsevier, vol. 91(C).
    11. Campos, Javier & Jiménez, Juan Luis & Perdiguero, Jordi, 2015. "Contestability and public concern about airfares: A case study in the Canary Islands," Transport Policy, Elsevier, vol. 42(C), pages 180-186.
    12. Bernardo, Valeria & Fageda, Xavier, 2020. "Impacts of competition on connecting travelers: Evidence from the transatlantic aviation market," Transport Policy, Elsevier, vol. 96(C), pages 141-151.
    13. Jorge Valido & M. Pilar Socorro & Francesca Medda, 2013. "DYPES: Vertical differentiation, schedule delay and entry deterrence: Low cost vs. full service airlines," Working Papers 2013-05, FEDEA.
    14. 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.
    15. William E. Bendinelli & Humberto F. A. J. Bettini & Alessandro V. M. Oliveira, 2024. "Airline delays, congestion internalization and non-price spillover effects of low cost carrier entry," Papers 2401.09174, arXiv.org.
    16. Bendinelli, William E. & Bettini, Humberto F.A.J. & Oliveira, Alessandro V.M., 2016. "Airline delays, congestion internalization and non-price spillover effects of low cost carrier entry," Transportation Research Part A: Policy and Practice, Elsevier, vol. 85(C), pages 39-52.
    17. Bernardo, Valeria & Fageda, Xavier & Teixidó, Jordi, 2024. "Flight ticket taxes in Europe: Environmental and economic impact," Transportation Research Part A: Policy and Practice, Elsevier, vol. 179(C).

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