%0 Journal Article
%T The "Southwest Effect" Revisited: An Empirical Analysis of the Effects of Southwest Airlines and JetBlue Airways on Incumbent Airlines from 1993 to 2009
%A Steven M. Wu
%J Michigan Journal of Business
%D 2012
%I University of Michigan
%X The expansion of Southwest Airlines and JetBlue Airways has sparked new empirical interest in the effects of low-cost carriers (LCC) on existing airfares. Namely, empirical studies have attempted to capture the threat, or potential competition, of an entrant. This paper examines incumbent airline prices as a result of potential and actual competition from both Southwest Airlines and JetBlue Airways from 1993 to 2009 by analyzing mean airfares as well as price dispersion on incumbent routes. I incorporate a panel OLS with fixed effects model as well as GLS model with random effects. Consistent with re-cent literature, this paper finds that legacy incumbents cut fares significantly when threatened by Southwest Airlines. However, low-cost incumbents do not exhibit the same magnitude of pre-emptive price cutting. When threatened by JetBlue, neither legacy nor low-cost carriers cut fares significantly, suggest-ing that incumbents react differently when threatened by Southwest versus JetBlue. The evidence of increased price dispersion is mixed with price dis-persion decreasing on legacy carrier routes as a result of Southwest threat and entry but increasing on legacy carrier routes as a result of JetBlue threat and entry.
%U http://michiganjb.org/issues/52/text52a.pdf