Prices, Profits, and Entry Decisions: The Effect of Southwest Airlines (Job Market Paper)
Abstract: In this paper, I examine how Southwest Airlines—the largest low-cost carrier (LCC) by far— influences the pricing, profits, and entry decisions of its competitors. While much of the literature on Southwest only examines nonstop flights, I extend this body of scholarship to incorporate connecting flights using various methods and data. First, I assume that the entry of Southwest and the market structures are exogenous. Using a set of fixed effects models, I find that incumbent legacy carriers cut both connecting and nonstop prices when Southwest starts to operate on a route. Moreover, price drops are much larger for connecting flights than for nonstop flights. Second, I relax the exogeneity assumptions and allow entry and market structures to be endogenous. By estimating a static game of simultaneous entry, I find that Southwest has a very strong, negative impact on the payoff functions of its competitors. This impact is firm-specific. When I break the entry down by product types, I find that the entry of a low-quality product affects opponents’ profits less than the entry of a high-quality product does. If facing the same type of entry, the profit of a low-quality product is more seriously affected than that of a high-quality product. In this instance, a low-quality product is a connecting service and a high-quality product is a nonstop service. Finally, by conducting counterfactual experiments, I find that Southwest has a substantial impact on the entry decision of each competitor and on the equilibrium number of non-Southwest firms in the market.
The Role of Reputation in Daily Deal Markets: The Case of Groupon
Abstract: This paper addresses the question of whether business reputation moderates the sales and promotion results of daily deal coupons and, if so, then to what extent. Groupon is a leader in the daily deal market. It announces a large amount of online discount vouchers on a daily basis, most of which are offered by small and local businesses. Using a unique dataset scraped from Groupon, I show that business reputation, measured by the percentage of positive reviews, is positively associated with the sales of coupons. I then include reputation from external platforms, specifically the star ratings from Yelp and Google. I find that although these ratings are positively associated with coupon sales, the impact is much smaller compared to the impact of Groupon ratings. Next, I use the number of Yelp reviews that mention the keyword “Groupon” as a proxy of customer flows which are brought in by Groupon vouchers directly, and show that reputation is positively associated with the promotion results of coupons.