Product Quality Choices and Competition: Evidence from the U.S. Airline Industry

Abstract

This paper examines how network carriers adjust product quality given the competition from a low cost carrier (LCC). While previous research has shown that product quality (measured by on-time performance) suffers from heightened competition by LCC (Prince and Simon, 2015), our results find the contrary. Network carriers differentiate themselves by offering higher product quality through lower seat density and more first class/business class seating. Network carrier’s product quality response to other LCCs depends on market overlap. When considerable overlap exists, network carriers offer higher product quality by reducing seating density and/or increasing the proportion of first class/business class seats.