THE SHORT AND LONG RUN EFFECTS OF ENTRY ON U.S. DOMESTIC AIR ROUTES

Abstract

In this article the authors use time series analysis and econometric models to address two questions related to entry on U.S. domestic airline routes: First, how different is the effect of the low cost carriers' entry onto routes from the entry of other carriers? Although low cost carriers such as Southwest may generate considerable publicity when they enter routes, it may be that established carriers, such as American and United, use a similar low fare entry strategy. Their entry could result in price effects and traffic generation not statistically different from that of the low cost carriers. Second, are the price and traffic effects of new entrants, both low cost and other carriers, sustained past the initial promotional period or are they merely promotional? In answering this question, the authors try to address the wider public policy question as to the longer-term consumer benefits from new entry. If competition is driven out of a market by low promotional fares, and if these fares are not maintained, then there is clearly little long-term benefit from route entry.

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