The Low-cost fare response to new entry

Purpose: This study analyzes easyJet's fare response to new entry. Traditionally, this stream of literature has focused on the reactions of network carriers to competition from low-cost carriers. As low-cost services spread, however, the number of low-cost incumbents is rising. This paper aims to shed light 16 on low-cost price behaviour in the European context. Method: The analysis is based on an original dataset composed of all fares offered by easyJet up to 90 days beforedeparture, on all flights during the period 2007-2009. We focus on short-term price reactions by employing the event study methodology. We decompose the price response into three terms: the average fare, dynamic pricing, and fare dispersion around the predicted price curve. Results: Our results show that easyJet's temporal price discrimination tends to decrease after a new entry, especially when the new entrant is a traditional carrier. There is also some evidence for an average fare reduction of about 3 %.