Strategic Responses to Competitive Threats: Airlines in Action

Kwoka, John E.; Batkeyev, Birzhan

doi:10.1007/s11151-018-9664-6

Cited by 10 publications

(11 citation statements)

References 19 publications

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“…As early as 1993, Bennett and Craun concluded that Southwest's operations on the Oakland-Burbank route resulted in a 55% decrease in prices. Later research studies found similar results by studying different routes and different settings, including [3][4][5][6][7][8][9]12] and many others.…”

Section: Related Literaturementioning

confidence: 79%

“…Given the fact that LCCs have been so successful, it is not surprising that they have attracted a lot of attention in the literature. A great deal of research has been conducted to demonstrate LCCs' dramatic downward pressure on airfares, which, in turn, leads to a significant increase in air travel demand and passenger traffic (examples include [2][3][4][5][6][7][8][9] and many others). Nevertheless, with a concurrent fare drop and overall traffic rise, it is unknown whether and to what extent LCCs may affect other carriers' profits on a route.…”

Section: Introductionmentioning

confidence: 99%

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Effects of Southwest Airlines on Carrier Profits and Entry Probabilities

Ren

2021

Mathematical Problems in Engineering

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This paper studies the effects of Southwest Airlines, the largest low-cost carrier (LCC) in the U.S., on other carriers’ payoff functions and entry probabilities. A static entry game model is developed and estimated by viewing entry as an indicator of underlying profitability and making use of Nash Equilibrium. Results indicate that Southwest has a remarkable and negative impact on the payoffs of other carriers. This impact is firm-specific, with LCCs being more affected than full-service carriers (FSCs). Comparing the two service types, the results show that Southwest’s nonstop presence apparently imposes more downward pressure on opponents’ profits than its connecting presence. A counterfactual experiment is then conducted. Once Southwest is counterfactually removed, the probability of each carrier entering a market significantly changes. This paper examines Southwest’s impacts from a new perspective and extends literature on entry game estimation.

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Section: Related Literaturementioning

confidence: 79%

Section: Introductionmentioning

confidence: 99%

Effects of Southwest Airlines on Carrier Profits and Entry Probabilities

Ren

2021

Mathematical Problems in Engineering

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“…Prior studies have found that incumbents usually adjust their marketing mix in response to a rival’s market entry (Gatignon et al , 1997; Goolsbee and Syverson, 2008; Kwoka and Batkeyev, 2019). However, there is little empirical knowledge about how these responses may impact NEs’ market performance and survival.…”

Section: Discussionmentioning

confidence: 99%

“…Typically, incumbents reduce prices in response to entry by new firms (Goolsbee and Syverson, 2008; Karakaya and Yannopoulos, 2010; Kwoka and Batkeyev, 2019). From an economic perspective, lowering prices, which may harm incumbents’ profits in the short term, will enable incumbents to increase their sales volume and, consequently, prevent NEs from achieving economy of scales (Steenkamp et al , 2005).…”

Section: Theoretical Background and Hypothesis Developmentmentioning

confidence: 99%

“…Market entry, however, is associated with a high level of risk as new entrants (hereafter NEs) almost certainly face challenges from incumbent firms. Incumbents, who cannot simply “wait and see,” deploy defensive strategies (Gatignon et al , 1997) to push NEs out of their market as allowing NEs to survive and eventually thrive can have destructive consequences on incumbents’ profitability and performance (Homburg et al , 2013; Jost, 2014; Karakaya and Yannopoulos, 2010; Kwoka and Batkeyev, 2019).…”

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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Entry diversion: Deterrence by diverting submarket entry

Uzunca

Cassiman

2020

Strategic Management Journal

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Research Summary Going back to Bain (1956), strategy scholars have long recognized the importance of deterring entry for sustaining incumbents' profits in an industry. We introduce a new mechanism, entry diversion, to better understand the empirical phenomenon of persistent firm entry in spite of investments in entry deterrence by incumbents in some industries. Entry diversion happens when preemptive strategic investments by incumbents decrease the expected future profits from a target submarket such that entrants choose to enter another submarket within the same industry. Empirical evidence from the global semiconductor manufacturing industry suggests that incumbents expand their capacities beyond demand growth, and that these investments effectively divert entry into other submarkets. Greenfield entrants are more responsive to entry diversion than incumbents. Managerial Summary Managers have long understood that deterring entry of new players into their industry could sustain their firms' profits. In this article, we introduce a new mechanism, entry diversion, where the incumbent diverts potential entrants from its submarket toward other submarkets in the same industry. Entry diversion happens when preemptive strategic investments by incumbents decrease the expected future profits of the entrant in a submarket of the industry such that the entrant chooses not to enter the incumbent's submarket. Contrary to entry deterrence, new players will still enter the industry but settle in different submarkets. Empirical evidence from the global semiconductor manufacturing industry suggests that incumbents expand their capacities beyond demand growth, and that these investments effectively divert entry into other submarkets.

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Strategic Responses to Competitive Threats: Airlines in Action

Cited by 10 publications

References 19 publications

Effects of Southwest Airlines on Carrier Profits and Entry Probabilities

Effects of Southwest Airlines on Carrier Profits and Entry Probabilities

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

Entry diversion: Deterrence by diverting submarket entry

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