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How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines

  • Austan Goolsbee

    (University of Chicago Graduate School of Business, American Bar Foundation, and National Bureau of Economic Research)

  • Chad Syverson

    (University of Chicago Graduate School of Business and National Bureau of Economic Research)

We examine how incumbents respond to the threat of entry by competitors (as distinct from how they respond to actual entry). We look specifically at passenger airlines, using the evolution of Southwest Airlines' route network to identify particular routes where the probability of future entry rises abruptly. We find that incumbents cut fares significantly when threatened by Southwest's entry. Over half of Southwest's total impact on incumbent fares occurs before Southwest starts flying. These cuts are only on threatened routes, not those out of non-Southwest competing airports. The evidence on whether incumbents are seeking to deter or accommodate entry is mixed. (c) 2008 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 123 (2008)
Issue (Month): 4 (November)
Pages: 1611-1633

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Handle: RePEc:tpr:qjecon:v:123:y:2008:i:4:p:1611-1633
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