Threat of market entry and low cost carrier competition

The paper analyzes how US legacy carriers and Southwest Airlines respond to the threat of entry by AirTran Airways. It is found that that legacy carriers' ex post equilibrium prices are on average lower, whereas those of Southwest are on average higher in response to AirTran's threat of entry. Once AirTran actually flies the route, while the prices of legacy carriers fall further, those of Southwest don't change significantly. Hence, estimation results suggest that the pricing behavior of a low-cost incumbent is quite different from incumbent legacy carriers in response to not only actual but also potential competition by a low-cost carrier entrant.

► I examine how US legacy carriers and Southwest respond to the threat of entry by AirTran.
► Southwest raises its fares significantly when threatened by AirTran.
► Legacy carriers drop their fares significantly when threatened by AirTran.
► Once AirTran flies the route, the prices of legacy carriers fall further.
► Once AirTran flies the route, Southwest's fares don't change significantly.