Entry, Price and Capacity Allocation: Evidence from Airline Market in China

Abstract: In this paper, we examine how incumbents respond to the presence of new entrants in the airline market in China. We utilize a unique dataset covering nearly all routes in China between May and December 2017, encompassing daily prices and sales of most Chinese airlines. We combine this dataset with historical flight plans spanning multiple years, providing capacity allocations of airlines across routes. Reduced-form analysis shows that incumbent prices decrease by 7.2% with a new entrant, but there is almost no change in flight-level load factors. This is largely because incumbents reduce their capacity on routes with new entrants and reallocate it to more profitable routes. Our future research will involve constructing a structural model in which pricing strategies, capacity reallocation, and entry decisions are all endogenously determined and investigating their welfare consequences.