In my first dissertation essay, "Incumbent Response to Entry by Low-Cost Carriers in the U.S. Airline Industry," I analyze the price response of incumbents to entry by low-cost carriers in the U.S. airline industry. Previous theoretical papers suggest that airlines might respond to entry by lowering prices to compete harder for existing customers or they might increase prices to exploit their brand-loyal customers. This paper tests which effect is more prominent in the airline industry. I find that when one of four low-cost carriers enters a particular route, legacy carrier incumbents respond differently than low-cost carrier incumbents to new low-cost carrier entry. Legacy carriers decrease their mean airfare, 10th percentile airfare, and 90th percentile airfare before and after entry by a low-cost carrier. However, low-cost carriers do not significantly alter their pricing strategy. The differing incumbent responses can be attributed to the finding that low-cost carrier entrants tend to match the price set by rival low-cost carriers in the quarter of entry and tend to enter with a lower price than that of legacy carrier incumbents. The results also suggest that entry does not affect price dispersion by incumbent carriers.
Legacy carriers have increasingly outsourced the operation of certain routes to regional airlines over the past decade. My second dissertation essay, "The Influence of Low-Cost Carriers on the Use of Regional Airlines," investigates how low-cost carriers influence where legacy carriers decide to use regional airlines. I find evidence that legacy carriers are more inclined to switch to regional airlines on routes where a low-cost carrier exists. Moreover, legacy carriers tend to not only decrease average airfares once they start outsourcing but also price match competing low-cost carriers. However, I do not find evidence that low-cost carriers are effectively deterred from entering routes where a regional airline is present. The results refute the notion that regional airlines can serve as an effective barrier to entry, while suggesting that legacy carriers exploit the more cost-efficient regional airlines in order to lower price and therefore better compete with low-cost carriers.
My third and final dissertation essay, "The Effect of De-Hubbing on Airfares," studies the price effect of de-hubbing, which occurs when an airline ceases hub operations at an airport. Legacy carriers dramatically decrease both the frequency of flights and the number of seats offered once it de-hubs an airport, whereas their competitors generally respond by maintaining their capacity level at the airport. As a result, prices could potentially decrease as the market becomes less concentrated or increase because the de-hubbing airline's capacity reduction diminishes the availability of substitutes. I perform an event study using four cases of de-hubbing at domestic airports between 2001 and 2006 to test which price effect dominates. Not only do average airfares increase after a legacy carrier de-hubs an airport but also the de-hubbing airline and its competitors at that airport tend to increase their prices by a similar percentage. The results suggest that de-hubbing ultimately leads to softer competition between airlines at the de-hubbed airport.