Working Paper: NBER ID: w3318
Authors: Michael D. Whinston; Scott C. Collins
Abstract: A number of recent papers have studied the relationship between price and market structure in the deregulated airline industry through a cross-sectional analysis of city-pair markets. Yet, while interesting, several potential difficulties underlie the inferences drawn in these analyses. In this paper, we consider an alternative approach that uses stock price reactions to entry announcements to shed light on the nature of competitive behavior in this industry. The analysis sheds light on three issues. First, it offers a clean test of contestable market theory. Second, it provides evidence on the level of profits or sunk costs present in these markets. Third, it sheds light on the degree of competitive "localization" existing in the industry. The particular entry events that we focus on are those involving People Express Airline in 1984 and 1985. To provide a more complete picture of the effects of these entry events, we also examine the price and quantity changes that occurred following entry.
Keywords: airline industry; deregulation; contestable markets; event study; stock prices
JEL Codes: L13; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Loss in value of incumbent airlines (L93) | Rejection of contestable market model (L13) |
| Entry of People Express (L93) | Loss in value of incumbent airlines (L93) |
| Entry of People Express (L93) | Reduction in prices by incumbents (D43) |
| Entry of People Express (L93) | Increase in scheduled service and sales quantity by incumbents (L81) |
| Entry of People Express (L93) | Competitive dynamics introduced (L13) |