Does Multipoint Competition amongst European Airlines Lead to a Reduction of Competitive Pressure? Mouyrin Renaud Ph.D. Student CEROG IAE Aix en Provence Financed and Supported by Eurocontrol Experimental Center Strategy Unit
Agenda • Theoretical Background • Purpose of the study • The Research Model & Hypotheses • Methodology – Data – Measures • Preliminary results provided by an alternative model • Next steps
Theoretical background: What is Multipoint Competition? • Situation in which firms meet simultaneously the same rivals in more than one market • As each City Pair connection can be considered as discrete market… • …airlines probably have multimarket contacts with competitors • One major element of the competitive interaction between 2 airlines that may influence their competitive behavior towards each other.
Theoretical background: The Mutual Forbearance Hypothesis • Theory : Familiarity Multimarket Competitive Contacts Intensity Deterrence • Multiple contacts give the option to respond to an attack by a rival not only in the challenged market • Airlines Competitive moves are linked across markets • Specter of retaliation reduces the motivation to act aggressively
Example in the US airlines industry (1989) Phoenix Houston America’s West hub Continental Airline’s hub • AW entered in H. with low introductory fares. • CA responded by lowering prices from P. • AW stopped immediately its low fares in H. • AW and CA entered into a code share agreement
Theoretical background: Past Researches • Empirical studies in the US airline Industry • Multimarket contacts lead to higher averages fares (Evans and Kessides, 1994; Gimeno, 1999) • Multimarket contacts in rival’s strategic markets (High Market share, High Market dependence, City Pair connectivity in the airline network) are more effective than contacts in rival’s secondary markets. (Gimeno, 1999) • Airline’s Market Entry in and Market Exit from rivals markets is unlikely when the 2 airlines are strong multipoint competitors (respectively to avoid competitive escalation and to maintain a deterrence mechanism) (Baum and Korn, 1996 and 1999)
Purpose of he study: Why testing Mutual Forbearance Hypothesis in the European Airlines Industry? • Data source geographical transposition, from the US airlines industry to the European One. • We have not yet reviewed an empirical study on the Multipoint Competition effects on the European industry • Is the competitive and the institutional frameworks of the European industry is adapted for airlines to achieve Mutual Forbearance Strategy? • Understand and highlight one potential source of European airlines industry competitive distortion.
The Model Research Airlines competitive Multipoint ? Interactions. Competition Competitive Moves. Airline Entry in rival’s territories Airline exit from Multimarket rival’s territories Contacts Airline competitive Period t commitment change in rival’s territories Period t+1
Multimarket Contacts and the dynamics of competitive interactions Effects of multimarket contacts on rates of market entry and exit and change in flight frequency (Baum and Korn, 1999) Multimarket Market entry rate / increase in flight Market exit rate / decrease in flight frequency frequency and seat capacity and seat capacity contact LOW Stimulated by Stimulated by - Aggressive interactions among airlines that - Aggressive interactions among airlines that meet in one or only a few routes meet in one or only a few market routes - Incentive to establish a foothold to signal ability to counterattack HIGH Suppressed by Suppressed by - Recognition of mutual dependence and - Decreased aggressiveness that follows potential for multimarket retaliation recognition of mutual dependence and potential for multimarket retaliation
Multimarket Contacts and the dynamics of competitive interactions Likelihood of Market entry in and exit from rival’s territories Multimarket contacts 0
Hypothesis • H1: A firm’s rate of entry into a competitor’s markets is related in an inverted manner to the level of multimarket contacts with the competitor. • H2: A firm’s rate of exit from a competitor’s markets is related in an inverted manner to the level of multimarket contacts with the competitor. • H3: The likelihood of a firm competitive commitment change into a competitor’s markets is related in an inverted manner to the level of multimarket contacts with the competitor.
Methodology: Data and sample description • Longitudinal and cross-market study. OAG data Base from 2002 to 2006. • Scheduled, Regular and Direct flight within the European Union (25) + Norway and Switzerland: Homogeneous Institutional framework • 3963 City Pair (markets); 119 carriers; 10506 unique Competitor-dyad/year (pairs of airlines by year)
Methodology: Measure of Independent variables • Multimarket contacts ijt between 2 airlines= Sum M it [C imt x (D imt x D jmt )]+ Sum M jt [C jmt x (D imt x D jmt )] M it + M jt Centrality of the route m Sets of Indicator variables set to the route networks of Markets equal to 1 if airlines i airlines i and j at time t served by and j are active in (airlines routes’ firms i and j route m at time t and strategic importance) at time t 0 otherwise
Examples Average Airline i Airline i's Airline Average Airline j's Weighted set Net PERIO centrality of j centrality of routes multipoin of Airline i Airline j Multipoint D routes set of in t Markets Contacts in contacts markets contacts with i contacts with j W2002 Aegean Airlines 24 74.07 Olympic Airlines 35 44.44 18 0.44 W2002 Olympic Airlines 35 44.44 Aegean Airlines 24 74.07 18 0.44 W2002 Blue1 24 80.21 Finnair 60 98.57 16 0.32 W2002 Finnair 60 98.57 Blue1 24 80.21 16 0.32 W2002 KLM 106 98.11 Transavia Airlines 20 85.71 12 0.17 W2002 Transavia Airlines 20 85.71 KLM 106 98.11 12 0.17 W2002 Alitalia 150 39.72 Volare Airlines 12 100.00 12 0.11 W2002 Volare Airlines 12 100.00 Alitalia 150 39.72 12 0.11 W2002 Air France 285 34.04 Iberia 232 38.44 12 0.02 W2002 Iberia 232 38.44 Air France 285 34.04 12 0.02
Measures: Dependant variables • Airline i Entry in rival’s j markets – The seasonally number of entry by airline i into each of its j competitor’s route • Airline i Exit from rival’s j markets – The seasonally number of exit by airline i from each of its j competitor’s route • Airline i change in competitive commitment in rival’s j markets – Average Airline i Change in flight frequency – Average Airline i Change in seat capacity in each of its j competitor’s route – Average Airline i Change in market share • Data Reduction Process through Principal Component Analysis Reliability Statistics Cronbach's Alpha N of Items Factorial Score Computation for each observation .717 3
Other Control Variables • Relative size (size j / size i) • Age of Airline i and j • Airline i’s route dominance over competitor j • Airline i’s entries into competitor j’s route (previous year) • Airline i’s average capacity (seats) route • Airline i’s average route density (number of competitors)
Preliminary Results • Not yet achieved empirical test of the research model presented. • Previous Model based on a market unit analysis (Airline route) not at firm level (interaction between airlines), provided exploratory and complementary results. Average Multimarket Contacts with each Variable Selection City Pair Competitors All Airlines 15.13 Airlines Entering new markets 11.78 Airlines Exiting Markets 10.86 Airlines Maintaining in markets 15.48
Preliminary results: Entry Rate and Multimarket Contacts 100,00 80,00 60,00 Entry_rate 40,00 20,00 0,00 Correlations Entry multimarke Rate t contact Entry rate Pearson Correlation 1 -.239** Sig. (2-tailed) .000 N 1437 1437 Multimarket Pearson Correlation -.239** 1 contact Sig. (2-tailed) .000 N 1437 1437 **. Correlation is significant at the 0.01 level (2-tailed).
Preliminary results: Airlines’ competitive commitment variance decreases while MC increase. Airlines_change_comp_commitment 2,50000 0,00000 -2,50000 Multimarket contacts
Preliminary results conclusions • The choice of markets to enter in and to exit from is partly determined by the level of multimarket contacts an airline has with its competitors. • The magnitude of airline’s changes in flight frequency, seats capacity and in market share, is also determined by multimarket contacts it has with its competitors. • Stability of an airline competitive behavior is more likely when it has a high level of multimarket contacts with its competitors
Next Steps • The preliminary analysis allows us to pursue investigations on European Airlines Mutual Forbearance Strategies but not to (in)validate hypotheses. • As Multipoint Competition is a property of the relationship between two airlines… • …we need to determine a fully model, integrating all competitor-dyadic level observations (with control variables), to be statistically tested through Poisson and Binomial regression analysis, which is actually running…
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