Monday, March 21, 2016

Competition and Firm Service Reliability Decisions: A Study of the Airline Industry

CHEN Zhou, ALBUQUERQUE Paulo, GREWAL Rajdeep
Read the working paper
INSEAD Working Paper 2016/18/MKT

To understand the impact of strategic competition on organizational service reliability decisions, this study investigates if firms in the airline industry consider competitors’ actions when making their service reliability decisions.
We apply two methods – a seemingly unrelated regression and a discrete game among airlines – to analyze data from the U.S. Bureau of Transportation Statistics on flight cancellations rates and duration of flight delays. We find that competitive effects lead firms to differentiate themselves on the levels (low vs. high) and dimensions (cancellation vs. delay) of service reliability. In counterfactual analyses, we show that commitment by a firm to low cancellation rates leads to improved service reliability in the overall market. Internal programs to improve service reliability, such as on-time bonuses, can significantly improve service reliability, however, ignoring competitive interactions can lead to the over-estimation of the impact of these programs on service reliability by more than 10%.