Learning and Exit Behavior of New Entrant Discount Airlines from City-Pair Markets

Abstract

In this research, the authors investigate firms' exit behaviors. On the basis of extant literature in economics, strategy, and marketing, the authors identify market- and firm-specific factors that influence exit behavior. They account for firms' uncertainty about a market's true attractiveness after entry on the probability of exiting a market. To evaluate exit decisions, they propose a Bayesian belief-updating model of learning embedded in a logit model that incorporates market- and firm-specific factors. The estimated evolution of beliefs over time enables the authors to determine whether firms use market information to update their prior beliefs about market attractiveness. The authors empirically investigate the market exits of new entrant discount airlines from city-pair markets. The results suggest that a combination of several market and firm factors influences exit behavior. Airlines' prior beliefs about market attractiveness are not necessarily consistent with the market's intrinsic attractiveness, and firms learn about the true market attractiveness over time. The authors also provide model comparisons with extant approaches to studying market exit and find that the proposed approach provides a better fit and predictive ability.