Entry and Competitive Structure in Deregulated Airline Markets: An Event Study Analysis of People Express

Abstract

While recent studies of deregulated airline prices considerably advance our understanding of competitive structure in this industry, they suffer from several weaknesses that could potentially undermine their inferences. In this article, we consider an alternative approach to this issue that uses the reactions of incumbent airlines' stock prices to announcements of entry by People Express to shed light on competitive structure. These stock reactions reveal significant route-specific profits or sunk costs (rejecting, for example, the contestable market model) and also provide evidence on the degree of competitive localization present in the industry. We also examine the price, sales quantity, and schedule changes that followed entry. These changes corroborate the conclusions emerging from our analysis of stock price reactions.