Final answer:
Price declines due to Southwest Airlines potentially entering the market are best explained by limit pricing, a strategy to deter competition by setting low prices. This tactic can lead to predatory pricing, a concern in the airline industry and other sectors, which results in maintaining incumbent firms' market power. Option B is correct.
Step-by-step explanation:
According to Sweeting, Roberts, and Gedge, price declines in response to Southwest Airlines becoming a potential entrant are best explained by limit pricing. This economic term refers to the strategy of reducing prices sufficiently low to deter new competitors from entering the market.
The large airline in this scenario employs this tactic against the small start-up airline by slashing prices to a level where the new entrant cannot sustain its business financially. Once the new entrant exits the market, the incumbent has the ability to increase prices once again.
The sequence of predatory pricing, where prices are reduced to eliminate competitors, and subsequent market dominance, can discourage other potential entrants from challenging the incumbent firm's position.
This is demonstrated in the historical accusations of predatory pricing between airlines such as ValuJet versus Delta, Frontier versus United, and Reno Air versus Northwest. It has also been seen in other industries, as with accusations against Amazon, Wal-Mart, and Target by the American Booksellers Association.
Ultimately, the pattern of predatory pricing and post-competition price hikes represents a significant barrier to entry, thereby allowing established firms to maintain market power and potentially establish a monopoly.