Financial conditions and incumbent quality responses to entry: Evidence from airlines' on-time performance

This paper examines if and how incumbent firms may adjust their quality provisions in response to entry, with particular attention to the role of financial conditions. Data comes from the U.S. aviation industry where Southwest Airlines, a leading low-cost carrier, has actively entered a large number of routes in the past decades. Using on-time performance to proxy for service quality, I find robust evidence that financial pressure signifi-cantly affects the quality changes of incumbents. While incumbents in good financial health enhance quality when responding to entry, those experiencing financial distress exhibit a different tendency and deteriorate quality. These findings highlight the impact of financing on product market competition and shed light on why previous research has found mixed results regarding the link between competition and service quality in the airline industry.