Strategic groups and product differentiation: Evidence from the Spanish airline market deregulation

Abstract

We examine the rivalry of strategic groups of formerly regulated carriers and low-cost entrants. Profit effects stemming from strategic interactions at the group level and resulting in product differentiation are considered. A conjectural variations model, addressing a critique by Corts, is used to test the hypothesis that group-level effects stemming from product differentiation lead to asymmetric behaviours by both groups of carriers within and between strategic groups. The effects of group-level strategic interactions on firm performance are analysed for two of the busiest and highest density routes in the Spanish domestic market. We find evidence of asymmetric rivalry behaviour within and between strategic groups.