Question

Kenneth Elzinga and David Mills (2018) "Predatory Pricing in the Airline Industry: Spirit Airlines v. Northwest (2005)", in Kwoka, J. and L. White (eds.), The Antitrust Revolution: Economics, Competition and Policy. What did Northwest do to respond Spirit’s entry? What was the result?

Answer 1

Northwest responded to Spirit Airlines' entry by engaging in predatory pricing, driving the low-cost entrant out of the market. This deterred potential new entrants and led to market consolidation, potentially resulting in higher prices for consumers over time.

Step-by-step explanation:

When a new entrant, like Spirit Airlines, entered the market offering routes between specific cities, the incumbent airline, Northwest, would respond by engaging in predatory pricing. This practice involves drastically dropping ticket prices below market rate, and potentially even below average variable costs, in order to drive the new competitor out of the market. Once the new entrant fails to sustain their operations under such pricing pressure and exits the market, the incumbent airline, such as Northwest, would then have the opportunity to raise the prices back to normal or higher levels.

This behavior is intended to deter potential new entrants from considering entry into the market due to the perceived risks of being unable to compete with established airlines that can absorb losses in the short term. A notable result of such predatory pricing practices is the consolidation of the market, which can lead to reduced competition and higher prices for consumers in the long run.