Keynote paper: Large-scale entry deterrence of a low-cost competitor: an early success of airline revenue management Online publication date: Sun, 29-Oct-2006
by Frederick H.deB. Harris
International Journal of Revenue Management (IJRM), Vol. 1, No. 1, 2007
Abstract: In both entry deterrence theory and practice, customer sorting in response to stockouts determines the best reply responses of incumbents threatened by entry. People Express (PE) chose the right strategy but for the wrong entry game and ended up being deterred in the Southeast region by the incumbent Piedmont Airlines (PI). Piedmont had recently developed the second earliest full-scale implementation of a real-time inventory management optimisation tool. By employing optimal capacity controls in segmented fare classes, Piedmont was able to increase the service quality to its higher-yield loyal business customers on the congested flights precipitated by the price war with PE. When prices returned to substantially higher cost-covering target price levels, Piedmont's revenue tripled while PE's revenue actually declined. Soon thereafter, it became clear that Piedmont had successfully deterred a low-cost discounter.
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