Price reactions to a rival’s market exit: evidence from the U.S. airline industry

Abstract

While antecedents of a rival’s exit have been extensively investigated, how a rival’s exit affects the market has been barely examined. Drawing on the contestable market theory, and utilizing a rich dataset of market exits in the airline industry, the authors investigate how incumbents respond to a rival’s exit by adjusting their prices. Contrary to widespread expectations, incumbents cut prices by 7% as soon as the rival leaves the market and keep their prices lower than the pre-exit level up to eight quarters afterward. The authors discuss the contributions to the marketing literature and provide actionable insights to managers and policymakers.