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

To understand the impact of competition on organizational service reliability decisions, this study investigates if firms in the airline industry consider competitors’ actions when making their service reliability decisions. Using data from the U.S. Bureau of Transportation Statistics on flight cancellation rates and average length of flight delays, the authors use two complementary approaches, a simultaneous equation model and a discrete game framework, to examine competitive influence on firm decisions on the level of service reliability. The authors find that competitive effects are asymmetric and differ by the type of firm and its competitors - full-service vs. low-cost airlines - as well by level of market concentration. The authors show that internal initiatives, such as on-time bonuses, can substantially improve service reliability, but require the firm to account for competitive reactions. Ignoring competitive effects leads to an over-estimation of the impact of these programs on service reliability levels.