Abstract
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.
Highlights
Introduction e UnitedStates commercial airlines can be divided into full-service carriers (FSCs) and low-cost carriers (LCCs)
Massive research studies have been conducted to assess the effects of LCCs on airfares and passenger traffic, their impacts on carrier profits or entry probabilities are rarely explored. is paper fills the gap
Conclusions and Discussion is paper studies the effects of Southwest Airlines on the profits and entry probabilities of other carriers in the U.S air travel market. e author constructs a static game of simultaneous entry similar to [10] and estimates the parameters using the bounds method proposed in [11]. e results show that Southwest has a notable, negative impact on the profits of other carriers
Summary
Is 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. Is impact is firm-specific, with LCCs being more affected than FSCs. Comparing the two service types, the results indicate that Southwest’s nonstop presence apparently imposes more downward pressure on opponents’ profits than its connecting presence. Massive research studies have been conducted to assess the effects of LCCs on airfares and passenger traffic, their impacts on carrier profits or entry probabilities are rarely explored. It extends literature on empirical entry games by being the first work to incorporate both nonstop and connecting services into the model. Calculate the vector of firms’ profits for each set of entry decisions, yg (for g 1, . . . , 22K):
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