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Entry and Accommodation in Airline Markets: Easyjet Caught in the Middle on the London-Grenoble Route

  • Cristina Barbot


    (CETE, Faculdade de Economia, Universidade do Porto)

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    Low cost carriers (LCCs) have recently proved that they can develop aggressive behaviour towards the threat of new entrants. This paper analyses the theoretical conditions under which a low cost carrier can deter or accommodate entry by means of product proliferation, using the example of Easyjet on the London-Grenoble route. Theoretical conclusions show that they can only deter entry if they launch a service with a quality that is superior to the entrant’s and to their own previous one. Otherwise, they accommodate entry by improving their old product, when they face the entry of a full service carrier (FSC), or by launching a new service, if they are caught in the middle of a FSC and another LCC. Empirical findings about competition in the same route in monopoly, duopoly and oligopoly with three firms show that price competition depends on the existence and nature of rivals, and on the level of demand.

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    Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 0602.

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    Length: 32 pages
    Date of creation: Jan 2006
    Date of revision:
    Handle: RePEc:por:cetedp:0602
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    1. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
    2. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers 2003-22, Brown University, Department of Economics.
    3. repec:ebl:ecbull:v:12:y:2005:i:4:p:1-11 is not listed on IDEAS
    4. Tae Hoon Oum & Anming Zhang & Yimin Zhang, 1995. "Airline Network Rivalry," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 836-57, November.
    5. 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.
    6. Lars-Hendrik Röller & Robin C. Sickles, 1997. "Capacity and Product Market Competition: Measuring Market Power in a "Puppy-Dog" Industry," CIG Working Papers FS IV 97-31, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    7. Ming Hsin Lin, 2005. "Alliances and entry in a simple airline network," Economics Bulletin, AccessEcon, vol. 12(4), pages 1-11.
    8. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
    9. Morrison, William G., 2004. "Dimensions of predatory pricing in air travel markets," Journal of Air Transport Management, Elsevier, vol. 10(1), pages 87-95.
    10. Gorin, Thomas & Belobaba, Peter, 2004. "Impacts of entry in airline markets: effects of revenue management on traditional measures of airline performance," Journal of Air Transport Management, Elsevier, vol. 10(4), pages 257-268.
    11. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
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