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Airport capacity and entry deterrence: Low cost versus full service airlines

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Abstract

We study entry deterrence in air transport markets with a full-service (FS) carrier (the incumbent) and a low-cost (LC) carrier (the potential entrant). We consider a vertically differentiated product model where airlines have different operating cost and different generalized prices so they compete in ticket prices and frequencies. Thus, more frequency allows airlines to increase ticket prices without losing demand. In this context, we show that the incumbent may increase the frequency offered in order to deter the LC carrier entry. We show that if the airport capacity is low enough the LC carrier entry can be easily blocked or deterred. However, if the airport capacity is sufficiently high, the LC carrier entry must be accommodated. Regulators should take these results into account in order to promote competition among airlines.

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... According to Ethiraj and Zhou (2019) airlines engage in competition through price-cutting, capacity expansion, and quality differentiation. Moreover, they state that 'entry deterrence' occurs due to a situation of excess capacity, as long as airports are not congested (Kappes and Merkert, 2013;Valido et al., 2020). However, such capacity can be reversed, since incumbent airlines operate on multiple heterogeneous routes. ...
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