We examine how incumbents respond to the threat of entry by competitors (as distinct from how they respond to actual entry). We look specifically at passenger airlines, using the evolution of Southwest Airlines’ route network to identify particular routes where the probability of future entry rises abruptly. We find that incumbents cut fares significantly when threatened by Southwest’s entry. Over half of Southwest’s total impact on incumbent fares occurs before Southwest starts flying. These cuts are only on threatened routes, not those out of non-Southwest competing airports. The evidence on whether incumbents are seeking to deter orHow do Syverson and Goolsbee distinguish threatened entry from actual entry? A figure (screenshot from this link) is useful to see this.
accommodate entry is mixed.
In sum, Syverson and Goolsbee find that Southwest's effect on rival prices, largely takes place prior to Southwest's actual entry when Southwest is merely threatening entry.