Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines' On-Time Performance

Abstract

We examine if and how incumbent firms respond to entry, and entry threats, using non-price modes of competition. Our analysis focuses on service quality within the airline industry. We find that incumbent on-time performance actually worsens in response to entry, and even entry threats, by Southwest Airlines. Given Southwest's general superiority in on-time performance, this result is consistent with equilibria of theoretical models of quality and price competition, which generally predict differentiation along quality. We corroborate this intuition with further analysis, showing there is no notable response by incumbents when an airline with average on-time performance (Continental) threatens to enter or enters a route.

Mergers and product quality: Evidence from the airline industry

“…However, contrary to this result, Prince and Simon (2013) …nd that incumbents'on-time performance actually worsens in response to entry, and the threat of entry, by Southwest Airlines and other low-cost carriers. 6 Draganska, Mazzeo andSeim (2009) andFan (2012) constitute important methodological contributions in using econometric models to predict how mergers may in ‡uence non-price product characteristic choices.…”

Actual and potential competition in international telecommunications

“…In contrast to Goolsbee and Syverson (2008) and Prince and Simon (2015), where potential competition changes due to a dominant entrant like Southwest Airlines, our data contain no information on specific potential entrants. 4 As such, our empirical model proxies for an increase in potential competition with the introduction of ISR across countries and through time.…”

“…Goolsbee and Syverson (2008) present evidence that incumbent airlines responded to the threat of entry from Southwest Airlines by reducing prices. Prince and Simon (2015) find that flight delays for incumbent airlines worsen in response to entry threats by Southwest Airlines. 3…”

“…Submarine cables also have other uses than being connected 5 Specifically, the econometric approaches from previous studies emphasize the economic conditions and outcomes faced by the incumbent firms rather than new entrants. See for example, Ellison and Ellison (2011) and Prince and Simon (2015). 6 The FB/FR distinction is made for FCC reporting requirements.…”

Low-cost carrier competition and airline service quality in Europe

“…Suzuki (2000) observes decreasing customer retention and shows that passengers after they have personally experienced delays are more likely to switch airlines for subsequent flights. Moreover, since customers consider delay as a form of product quality, decreasing on-time flight performance has a negative influence on airline fares (see Prince and Simon, 2015).…”