Dynamic Effect of Low-Cost Entry on the Conduct Parameter: An Early-Stage Analysis of Southwest Airlines and America West Airlines
The purpose of this research is to investigate the dynamic changes in the competition between air carriers by applying a revised conduct parameter method. We examined the cases of Southwest Airlines and America West Airlines due to the availability of data. Our interest is in what fashion a low-cost carrier (LCC) entered the market, how the rival reacted, and whether the fashions of competition between two types of air carrier remained stable as time passed. Our empirical results obtained by econometric methods using 894 sample observations show that the fashions of competition fell between Cournot competition and ``P=MC (price equals marginal cost)" competition, and sometimes the fashions were stable and sometimes not. Beyond four or five years after new entry by an LCC, these two fashions of competition reached a state of equilibrium. An implication for industrial policy is that an LCC' s entry improves consumer surplus but it seems not to maximize social welfare.
|Date of creation:||Jul 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.b.kobe-u.ac.jp/repec/kbb/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tae Hoon Oum & Xiaowen Fu & Mark Lijesen, 2005.
"An Analysis of Airport Pricing and Regulation in the Presence of Competition Between Full Service Airlines and Low Cost Carriers,"
CIRJE-F-316, CIRJE, Faculty of Economics, University of Tokyo.
- Xiaowen Fu & Mark Lijesen & Tae H. Oum, 2006. "An Analysis of Airport Pricing and Regulation in the Presence of Competition Between Full Service Airlines and Low Cost Carriers," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 40(3), pages 425-447, September.
- Lau, Lawrence J., 1982. "On identifying the degree of competitiveness from industry price and output data," Economics Letters, Elsevier, vol. 10(1-2), pages 93-99.
- Brander, James A. & Zhang, Anming, 1993. "Dynamic oligopoly behaviour in the airline industry," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 407-435, September.
- Austan Goolsbee & Chad Syverson, 2004.
"How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines,"
04-04, NET Institute, revised Dec 2004.
- Austan Goolsbee & Chad Syverson, 2008. "How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1611-1633, November.
- Austan Goolsbee & Chad Syverson, 2005. "How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," NBER Working Papers 11072, National Bureau of Economic Research, Inc.
- 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.
- Iwata, Gyoichi, 1974. "Measurement of Conjectural Variations in Oligopoly," Econometrica, Econometric Society, vol. 42(5), pages 947-66, September.
- Lindh, T., 1988.
"The Inconsistency Of Consistent Conjectures: Coming Back To Cournot,"
1988d, Uppsala - Working Paper Series.
- Lindh, Thomas, 1992. "The inconsistency of consistent conjectures : Coming back to Cournot," Journal of Economic Behavior & Organization, Elsevier, vol. 18(1), pages 69-90, June.
- James A. Brander & Anming Zhang, 1990. "Market Conduct in the Airline Industry: An Empirical Investigation," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 567-583, Winter.
- Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
- Fu, Xiaowen & Dresner, Martin & Oum, Tae H., 2011. "Effects of transport service differentiation in the US domestic airline market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 47(3), pages 297-305, May.
- Corts, Kenneth S., 1998. "Conduct parameters and the measurement of market power," Journal of Econometrics, Elsevier, vol. 88(2), pages 227-250, November.
- Bresnahan, Timothy F, 1981. "Duopoly Models with Consistent Conjectures," American Economic Review, American Economic Association, vol. 71(5), pages 934-45, December.
- Karen Clay & Werner Troesken, 2003. "Further Tests of Static Oligopoly Models: Whiskey, 1882-1898," Journal of Industrial Economics, Wiley Blackwell, vol. 51(2), pages 151-166, 06.
- Steven Puller, 2009. "Estimation of competitive conduct when firms are efficiently colluding: addressing the Corts critique," Applied Economics Letters, Taylor & Francis Journals, vol. 16(15), pages 1497-1500.
When requesting a correction, please mention this item's handle: RePEc:kbb:dpaper:2012-25. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yasuyuki Miyahara)
If references are entirely missing, you can add them using this form.