Do Low-Quality Products Affect High-Quality Entry? Multiproduct Firms and Nonstop Entry in Airline Markets

Abraham Dunn, EAG 07-12, September 2007
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Abstract:
This paper studies the effect of product ownership and quality on nonstop entry in the airline industry. Specifically, this paper empirically examines the decision of an airline to offer high quality nonstop service between cities given that the airline may or may not be offering lower quality one-stop service. I find that airlines that offer one-stop service through a hub are less likely to enter that same market with nonstop service than those that do not. In addition, the quality of the one-stop service is an important determinant of entry. Airlines are more likely to enter a market with nonstop service if their own or their rival'.s one-stop service in the market are of lower quality. Estimates suggest that the entry of a rival nonstop carrier diminishes the probability a carrier enters the market with nonstop service. However, airlines offering one-stop service respond differently to nonstop rivals. In particular, relative to other carriers, those offering one-stop service are more likely to enter markets if there are nonstop rivals, suggesting that cannibalization effects are diminished in the presence of nonstop competition.