APPENDIX 4

APPENDIX 4

The example involved the Reno-Minneapolis market. In this case, the major network carrier had previously served that market but had withdrawn from it. However, after a new airline entered the market, the major network carrier responded in several ways. First, it added new service overlaid on the entrant's network. This included three new daily nonstop flights from the same origin (Reno) to three different destinations; these were markets served by the entrant and not previously served by the network carrier. Moreover, the network carrier announced that it would begin a second daily flight from the same origin to one of the three destinations (Seattle). In addition, the network carrier announced that it would offer bonus frequent flier miles for the residents of the city of origin (Reno) on the routes that it offered from that city. It also stated that it would offer special travel agent commission overrides on flights to and from the city of origin.

Two days after the above actions, the network carrier also announced air fares to match the fares of the low-cost entrant on the Reno to Minneapolis route. It had initially announced lower fares than the fares of the entrant. It also announced that its fares for nonstop flights between several cities would be the same as those of the entrant's connecting service via Reno.

The entrant began service from Reno to Minneapolis service on April 1, as originally intended, but by May 20 losses forced it to reduce its service to one flight a day. On June 1, 1993, Reno Air exited the Reno to Minneapolis market. The fares of the network carrier between several cities had dropped sharply in response to the entry of the new small airline into the Reno to Minneapolis market. However, following the exit of the new airline from that market, these fares increased quickly and steadily. In two to three quarters, the fares of the network carrier had increased to a level higher than before the entry of the new entrant. (Source: Oster and Strong, 2001, pp. 9-13)