Effects of Southwest Airlines' entry and airport dominance

Abstract

We empirically analyzed the pricing behavior of Southwest Airlines and its rivals in markets into which Southwest Airlines had newly entered. We used simultaneous demand and price equations using US airline industry data for the fourth quarters of 2003–2010. Our results produced two important findings. First, Southwest Airlines may set flexible prices while enjoying own airport dominant power after its entry. Second, Southwest Airlines' rivals set competitive prices after it entered their markets, but they set more competitive prices beginning in the fourth year after Southwest Airlines’ entry on routes through airports where Southwest Airlines was not a dominant power.