Working Paper: NBER ID: w11072
Authors: Austan Goolsbee; Chad Syverson
Abstract: 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 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.
Keywords: Airline competition; Entry deterrence; Pricing strategy
JEL Codes: L11; L19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Threat of Southwest's entry (L93) | Incumbents cut fares (R48) |
| Threat of Southwest's entry (L93) | Anticipation of increased competition (L13) |
| Anticipation of increased competition (L13) | Incumbents cut fares (R48) |
| Threat of Southwest's entry (L93) | Fare reductions specific to threatened routes (R48) |
| Incumbents cut fares (R48) | Not driven by general market conditions (G19) |
| Incumbents cut fares (R48) | Mixed support for deterring entry (F55) |
| Threat of Southwest's entry (L93) | Strategic pricing behavior of incumbents (D43) |