Network effects and incumbent response to entry threats: empirical evidence from the airline industry
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arXiv
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| Formato: | Preprint |
| Publicado: |
2025
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| _version_ | 1866915176332132352 |
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| author | Lawford, Steve |
| author_facet | Lawford, Steve |
| contents | I investigate how incumbents in the U.S. airline industry respond to threatened and actual route entry by Southwest Airlines. I use a two-way fixed effects and event study approach, and the latest available data from 1999-2022, to identify a firm's price and quantity response. I find evidence that incumbents cut fares preemptively (post-entry) by 6-8% (16-18%) although the significance, pattern, and timing of the preemptive cuts are quite different to Goolsbee and Syverson's (2008) earlier results. Incumbents increase capacity preemptively by 10-40%, up to six quarters before the entry threat is established, and by 27-46% post-entry. My results suggest a clear shift in firms' strategic response from price to quantity. I also investigate the impact of an incumbent's network structure on its preemptive and post-entry behaviour. While the results on price are unclear, a firm's post-entry capacity reaction depends strongly on its global network structure as well as the local importance (centrality) of the route. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2502_20418 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Network effects and incumbent response to entry threats: empirical evidence from the airline industry Lawford, Steve General Economics Economics I investigate how incumbents in the U.S. airline industry respond to threatened and actual route entry by Southwest Airlines. I use a two-way fixed effects and event study approach, and the latest available data from 1999-2022, to identify a firm's price and quantity response. I find evidence that incumbents cut fares preemptively (post-entry) by 6-8% (16-18%) although the significance, pattern, and timing of the preemptive cuts are quite different to Goolsbee and Syverson's (2008) earlier results. Incumbents increase capacity preemptively by 10-40%, up to six quarters before the entry threat is established, and by 27-46% post-entry. My results suggest a clear shift in firms' strategic response from price to quantity. I also investigate the impact of an incumbent's network structure on its preemptive and post-entry behaviour. While the results on price are unclear, a firm's post-entry capacity reaction depends strongly on its global network structure as well as the local importance (centrality) of the route. |
| title | Network effects and incumbent response to entry threats: empirical evidence from the airline industry |
| topic | General Economics Economics |
| url | https://arxiv.org/abs/2502.20418 |