Wednesday, December 08, 2004

Interesting Articles

A couple of new articles that look interesting:
The Effect of Entry and Market Structure on Cellular Pricing Tactics

BY: KATJA SEIM
Stanford University
Graduate School of Business
V. BRIAN VIARD
Stanford University
Graduate School of Business


Paper ID: NET Institute Working Paper No. 03-13
Date: November 2004


ABSTRACT:
We test the effect of entry on the tariff choices of incumbent cellular firms. We relate the change in the breadth of calling plans between 1996, when incumbents enjoyed a duopoly market, and 1998, when incumbents faced increased competition from personal communications services (PCS) firms. Entry by PCS competitors differed across geographic markets due to the number of licenses left undeveloped as a result of the bankruptcy of some of the auctions' winning bidders and due to variation across markets in the time required to build a sufficiently large network of wireless infrastructure. We find that incumbents increase tariff variety in markets with more entrants and that this effect is not explained by demographic heterogeneity or cost differences in maintaining calling plans across markets. We also find that incumbents are more likely to upgrade their technology from the old analog technology to the new digital technology in markets with more entry, suggesting that entry also has indirect effects on tariff choice via firms' technology adoption decisions.
How do Incumbents Respond to the Threat of Entry on Their Networks? The Case of the Major Airlines

BY: AUSTAN GOOLSBEE
University of Chicago
Graduate School of Business
National Bureau of Economic Research (NBER)
CHAD SYVERSON
University of Chicago
Department of Economics
National Bureau of Economic Research (NBER)

Paper ID: NET Institute Working Paper No. 04-04
Date: October 2004


ABSTRACT:
This paper examines how incumbents respond to the threat of entry of competitors, as distinguished from their response to competitors' actual entry. It uses a case study from the passenger airline industry--specifically, the evolution of Southwest Airlines' route network--to identify particular routes where the probability of future entry rises abruptly. When Southwest begins operating in airports on both sides of a route but not the route itself, this dramatically raises the chance they will start flying that route in the near future. We examine the pricing of the incumbents on threatened routes in the period surrounding such events. We find that incumbents cut prices significantly when threatened by Southwest's entry into their routes. This is true even after controlling in several ways for airport-specific operating costs. The response of incumbents seems to be limited only to the threatened route itself, and not to routes out of nearby competitor airports where Southwest does not operate (e.g., fares drop on routes from Chicago Midway but not Chicago O'Hare). The largest responses appear to be restricted to routes that were concentrated beforehand. Incumbents do experience short-run increases in their passenger loads concurrent with these fare cuts. This is consistent with theories implying incumbents will try to generate some longer-term loyalty among current customers before the entry of a new competitor. We examine evidence relating this motive to build demand stock to frequent flyer programs and find suggestive evidence in favor of this notion. There is only weak evidence that incumbents increase capacity on the routes.

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