Entry, Contestability, and Deregulated Airline Markets: An Event Study Analysis of People Express
Michael D. Whinston
Scott C. Collins
A number of recent papers have studied the relationship between price and
market structure in the deregulated airline industry through a cross-sectional
analysis of city-pair markets. Yet, while interesting, several potential
difficulties underlie the inferences drawn in these analyses. In this paper,
we consider an alternative approach that uses stock price reactions to entry
announcements to shed light on the nature of competitive behavior in this
industry. The analysis sheds light on three issues. First, it offers a clean
test of contestable market theory. Second, it provides evidence on the level
of profits or sunk costs present in these markets. Third, it sheds light on
the degree of competitive "localization" existing in the industry. The
particular entry events that we focus on are those involving People Express
Airline in 1984 and 1985. To provide a more complete picture of the effects of
these entry events, we also examine the price and quantity changes that
occurred following entry.
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