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Strategic Responses to Competitive Threats: Airlines in Action

Abstract

Firms compete with each other in numerous ways, but particularly interesting are the various ways in which they respond to competitive threats to their critical assets and operations. Firms may mount vigorous defenses, or they may launch offensive strategies—by some definitions perhaps even predatory—or they may do nothing at all. This paper takes a selective empirical approach to analyzing such actions. We examine one industry—airlines—and two carriers—United and US Airways—and analyze their price and capacity strategies when confronted by entry on specific routes or by certain rivals. This approach limits exogenous variation while offering insights into the determinants of incumbents’ strategies, such as the identity of the entrant, the likely prospects for driving it out, the nature of airport or route competition, and so forth.

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Notes

  1. For summaries, see Tirole (1988), Aghion and Bolton (1987), Klemperer (1987).

  2. This, of course, does not imply that such markets are “contestable” since ground infrastructure, marketing, and network connectivity all limit the free flow of airborne capital from route to route.

  3. See Kwoka et al. (2016) for evidence with regard to competition between flights at adjacent airports.

  4. Here we follow Goolsbee and Syverson’s approach.

  5. Virgin did, however, serve JFK airport in the New York area, with service to San Francisco, Los Angeles, Fort Lauderdale, Palm Springs, and Las Vegas. There is little doubt, however, that adjacent airports are generally distinct for most travelers.

  6. We combine data for Continental Airlines and United, whose merger was announced in 2010.

  7. Analysis of passenger data indicates that the price reduction was not due simply to demand shift.

  8. Since these estimates are relative to the entry period, their statistical significance can be read directly.

  9. A similar scenario of punishment for entry was part of the Justice Department case against American Airlines for predatory pricing against low-cost entrants at American’s Dallas–Fort Worth hub in 1999. See Edlin and Farrell (2004).

  10. Similar muted competition among legacies has been found in Kwoka et al. (2016).

  11. This disparity of entry dates precludes combining these events into the same regression model.

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Correspondence to John Kwoka.

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Comments from seminar participants at the International Industrial Organization Conference and the EARIE meetings are gratefully acknowledged. Remaining errors are the sole responsibility of the authors.

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Kwoka, J., Batkeyev, B. Strategic Responses to Competitive Threats: Airlines in Action. Rev Ind Organ 54, 83–109 (2019). https://doi.org/10.1007/s11151-018-9664-6

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Keywords

  • Airlines
  • Entry
  • Strategic entry deterrence