Price reactions to a rival’s market exit: evidence from the U.S. airline industry

Aghaie, Sina; Javadinia, Amir; Cockrell, Seth

doi:10.1080/10696679.2021.2008802

Cited by 2 publications

(2 citation statements)

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“…FuelPrice : As fuel costs account for almost 30% of airlines’ operating costs, fluctuations in fuel price may impose an enormous impact on airlines’ performance (Aghaie et al , 2022), and impact how many markets, they are able to compete in. Accordingly, we include fuel prices in our model.…”

Section: Empirical Analysismentioning

confidence: 99%

“…We contribute to the growing body of literature on market entry and exit (Aghaie et al , 2022; Claussen et al , 2018; Ethiraj and Zhou, 2019; Lieberman et al , 2017; Uzunca and Cassiman, 2020) by examining the impact of price-cut and capacity expansion side by side and exploring the moderating role of RMBAs. Additionally, we control for a broad set of NE-, incumbent- and market-specific factors that could impact NEs’ exit to rule out alternative explanations.…”

Section: Introductionmentioning

confidence: 99%

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Incumbent defense strategies and new entrants market exit: the moderating role of relational market-based assets

Aghaie

Kamran-Disfani

Javadinia

et al. 2022

EJM

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Purpose The purpose of this study is to empirically investigate the impact of incumbents’ defensive strategies, specifically price-cut and capacity expansion, on new entrants’ (NEs) exit decisions and examine the moderating role of incumbents’ relational market-based assets (RMBAs). Design/methodology/approach Drawing upon real options theory, an empirical study using logistic regression is conducted on a rich, multi-market data set of NE exits between 1997 and 2019 in the U.S. airline industry. Findings Contrary to intuitive expectation, the results show that cutting prices in response to entry reduces NEs’ likelihood of market exit. However, when incumbents possess strong RMBAs, using a price cut proves to be effective in pushing NEs out of a market. Moreover, an NEs’ exit likelihood is higher when incumbents expand capacities in response to entry. Research limitations/implications In this study, market exit is defined as a complete withdrawal from the market and operationalized as a binary variable. Future research could examine different degrees of downscaling by NEs while remaining in the market. Practical implications This research demonstrates the opposing effects of price-cut and capacity expansion and the crucial role of RMBAs and advises managers to be cautious and consider trade-offs when implementing their defensive strategies to push NEs out of their markets. Originality/value This study contributes to the literature by examining the impact of incumbents’ defensive strategies, price-cut and capacity expansion, side by side and exploring the moderating role of RMBAs. Extant research has focused on antecedents of defensive strategies, whereas the consequences are the focus of this research.

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Section: Empirical Analysismentioning

confidence: 99%