Dynamic Effect of Low-Cost Entry on the Conduct Parameter: An Early-Stage Analysis of Southwest Airlines and America West Airlines

Hideki Murakami

Graduate School of Business, Kobe University, Kobe, Japan.

DOI: 10.4236/me.2013.44032                

Abstract

The purpose of this research is to investigate the dynamic changes in the competition between air carriers by applying a revised conduct parameter method. We examine the cases of Southwest Airlines and America West Airlines due to the availability of data. Our interests are in what fashion a low-cost carrier entered the market, how the rival reacted, and whether the fashions of competition between two types of air carrier remained stable as time passed. Our empirical results show that the fashions of competition fell between Cournot and “P = MC” competition, and competitive fashions were sometimes stable but sometimes not.

Keywords

Low-Cost Carrier (LCC); Entry; Dynamic Analysis; Conduct Parameter

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	S. A. Morrison and C. Winston, “The Evolution of Airline Industry,” Brookings Institution, 1995.
[2]	M. Dresner, J. S. C. Lin and R. Windle, “The Impact of Low-Cost Carriers on Airport and Route Competition,” Journal of Transport Economics and Policy, Vol. 30, No. 3, 1996, pp. 309-328.
[3]	S. A. Morrison, “Actual, Adjacent, and Potential Competition: Estimating the Full Effect of Southwest Airlines,” Journal of Transport Economics and Policy, Vol. 35, No. 2, 2001, pp. 239-256.
[4]	T. W. Vowles, “The Effect of Low Fare Air Carriers on Airfares in the US,” Journal of Transport Geography, Vol. 8, No. 2, 2000, pp. 121-128. doi:10.1016/S0966-6923(99)00033-2
[5]	A. Goolsbee and C. Syverson, “How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines,” NBER Working Paper, 2005.
[6]	A. V. M. Oliveira and C. Huse, “Localized Competitive Advantage and Price Reactions to Entry: Full-Service vs. Low-Cost Airlines in Recently Liberalized Emerging Markets,” Transportation Research Part E, Vol. 45, No. 2, 2009, pp. 307-320. doi:10.1016/j.tre.2008.09.003
[7]	X. Fu, M. Lijesen and T. H. Oum, “An Analysis of Airport Pricing and Regulation in the Presence of Competition between Full Service Airlines and Low Cost Carriers,” Journal of Transport Economics and Policy, Vol. 40, No. 3, 2006, pp. 425-447.
[8]	X. Fu, M. Dresner and T. H. Oum, “Effects of Transport Service Differentiation in the US Domestic Airline Market,” Transportation Research Part E, Vol. 47, No. 3, 2011, pp. 297-305. doi:10.1016/j.tre.2010.11.002
[9]	T. Fischer and D. R. Kamerschen, “Price-Cost Margins in the US Airline Industry Using a Conjectural Variation Approach,” Journal of Transport Economics and Policy, Vol. 37, No. 2, 2003, pp. 227-259.
[10]	X. Fageda, “Measuring Conduct and Cost Parameters in the Spanish Airline Market,” Review of Industrial Organization, Vol. 28, No. 4, 2006, pp. 279-399. doi:10.1007/s11151-006-9104-x
[11]	H. Murakami, “An Empirical Analysis of Inter-Firm Rivalry between Japanese Full-Service and Low-Cost Carriers,” Pacific Economic Review, Vol. 16, No. 1, 2011, pp. 103-119. doi:10.1111/j.1468-0106.2010.00537.x
[12]	J. A. Brander and A. Zhang, “Market Conduct in the Airline Industry: An Empirical Investigation,” RAND Journal of Economics, Vol. 21, No. 4, 1990, pp. 567-583.
[13]	J. A. Brander and A. Zhang, “Dynamic Oligopoly Behavior in the Airline Industry,” International Journal of Industrial Organization, Vol. 11, No. 3, 1993, pp. 407-435. doi:10.1016/0167-7187(93)90017-7
[14]	T. H. Oum, A. Zhang and Y. Zhang, “Inter-Firm Rivalry and Firm-Specific Price Elasticities in the Deregulated Airline Markets,” Journal of Transport Economics and Policy, Vol. 27, No. 2, 1993, pp. 171-192.
[15]	K. S. Corts, “Conduct Parameters and the Measurement of Market Power,” Journal of Econometrics, Vol. 88, No. 2, 1999, pp. 227-250. doi:10.1016/S0304-4076(98)00028-1
[16]	S. L. Puller, “Estimation of Competitive Conduct When Firms Efficiency Colluding: Addressing the Corts Critique,” Applied Economics Letters, Vol. 16, No. 15, 2009, pp. 1497-1500. doi:10.1080/13504850701578900
[17]	G. Iwata, “Measurement of Conjectural Variation Oligopoly”, Econometrica, Vol. 42, No. 5, 1974, pp. 947-966. doi:10.2307/1913800
[18]	T. Bresnahan, “Duopoly Models with Consistent Conjectures,” American Economic Review, Vol. 71, No. 5, 1981, pp. 934-945.
[19]	T. Bresnahan, “Empirical Studies of Industries with Market Power,” In: R. Schmalansee and R. Willig, Eds., The Handbook of Industrial Organization, Vol. II, Elsevier, Amsterdam, 1989, pp. 1011-1057.
[20]	T. Lindh, “The Inconsistency of Consistent Conjectures: Coming Back to Cournot,” Journal of Economic Behavior and Organization, Vol. 18, No. 1, 1992, pp. 69-90. doi:10.1016/0167-2681(92)90053-E
[21]	P. C. Reiss and F. A. Wolak, “Structural Econometrics Modeling: Rationales and Examples from Industrial Organization,” In J. J. Heckman and E. E. Leaner, Eds., Handbook of Econometrics, Vol. 6, Part 1, Elsevier, Amsterdam, 2007, pp. 4277-4415.
[22]	D. W. Kim and C. R. Knittel, “Biases in Static Oligopoly Models: Evidence from the California Electricity Market,” Journal of Industrial Economics, Vol. 54, No. 4, 2006, pp. 451-470. doi:10.1111/j.1467-6451.2006.00296.x
[23]	L. J. Lau, “On Identifying the Degree of Competitiveness from Industry Price and Output Data,” Economic Letters, Vol. 10, No. 1-2, 1982, pp. 93-99. doi:10.1016/0165-1765(82)90122-7
[24]	C. D. Wolfram, “Measuring Duopoly Power in the British Electricity Spot Market,” American Economic Review, Vol. 89, No. 4, 1999, pp. 805-826. doi:10.1257/aer.89.4.805
[25]	K. Clay and W. Troeskin, “Further Test of Static Oligopoly Models: Whiskey, 1882-1898,” Journal of Industrial Economics, Vol. 51, No. 2, 2003, pp. 151-166. doi:10.1111/1467-6451.00196
[26]	D. Genesove and W. Mullin, “Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914,” RAND Journal of Economics, Vol. 29, No. 2, 1994, pp. 355-377.