Rivalry And Forbearance In The European Airline In Essay

4710 WordsMar 8, 201219 Pages
RIVALRY AND FORBEARANCE IN THE EUROPEAN AIRLINE INDUSTRY: EVIDENCE OF AN INVERTED U-SHAPED COMPETITIVE PATTERN Michel GHERTMAN Professor University of Nice-Sophia Antipolis (UNS) and Senior Researcher, GREDEG Zied GUEDRI Associate Professor EM Lyon Email: guedri@em-lyon.com 23 Avenue Guy de Collongue – F 69134 Ecully Cedex, France Phone : +33 4 78 33 70 05 We are grateful to EUROCONTROL for its financial support. We also thank Renaud Mouyrin for his valuable efforts in constructing the database. 1 ABSTRACT This study develops and tests a theoretical framework which suggests that the relationship between the level of multi-territory (or multi-point) contact and rivalry takes the form of an inverted U-shaped relationship. Drawing on a large sample of European airlines over the period 2002 -2006, we provide empirical support for the inverted U-shaped relationship between multi-territory CONTACT and rivalry as reflected by entries into and exits from the territory of a competitor. We conclude that competition between firms exhibits successive periods of rivalry and forbearance, possibly independently of time and institutional settings. 2 * INTRODUCTION Pure neo-classical Market competition is an ideal (Demsetz, 1967), in which price is the only competitive signal used by firms to produce the quantity of goods leading to a stable equilibrium at the margin. Rivalry between individual firms or pairs of firms is not identified and is not central to the neo-classical economics theory. The same holds for Industrial Organization theory which focuses primarily on Market structure (Baines, 1951), industry attractiveness (Porter, 1980) and economies of scale and scope (Chandler, 1990). Similarly, the New Institutional Economics research does not focus on rivalry between firms. Institutions of the Environment create the rules of the game and incentives for

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