Thursday, October 7, 2010
Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines’ On-Time Performance
Posted by D. Daniel Sokol
Jeffrey T. Prince (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) and Daniel H. Simon (School of Public and Economic Affairs, Indiana University) have an interesting new paper on 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.