The "Southwest Effect" Revisited: An Empirical Analysis of the Effects of Southwest Airlines and JetBlue Airways on Incumbent Airlines from 1993 to 2009

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.