ValuJet update May 11, 1996: ValuJet flight from Miami to Atlanta crashes in Everglades, killing 110 May 11, 1996: ValuJet flight from Miami to Atlanta crashes in Everglades, killing 110 –caused by illegally loaded oxygen generators Investigation reveals long list of previous safety incidents; ValuJet loses its carrier certificate Investigation reveals long list of previous safety incidents; ValuJet loses its carrier certificate September 1997: Merger of ValuJet with AirTran Airlines, operate under AirTran name. Some changes: September 1997: Merger of ValuJet with AirTran Airlines, operate under AirTran name. Some changes: –Business class introduced –Reserved seats –New planes: Boeing 717, the original MD-95 mentioned in case Meanwhile, Delta introduced Delta Express to serve vacation markets Meanwhile, Delta introduced Delta Express to serve vacation markets

ValuJet takeaways: Judo strategy Two possible models to apply: Two possible models to apply: –Vertical product differentiation: cost vs. benefit strategy –“Judo economics” How do you enter an untapped market segment without provoking competitors to respond aggressively? How do you enter an untapped market segment without provoking competitors to respond aggressively? –By restricting capacity –By making it unattractive for rival’s customers to switch  Lower benefit actually supports ValuJet’s differentiation strategy

ValuJet takeaways: Judo strategy (cont’d) Why couldn’t Delta achieve the same as monopolist, through price discrimination? Why couldn’t Delta achieve the same as monopolist, through price discrimination? –Indirect (2 nd degree) price discrimination not effective enough to prevent cannibalization –Also requires quality differentiation and different set of operations to keep costs low

ValuJet takeaways: Strategic effects We’ve talked a lot about positioning and fit, cost & benefit drivers We’ve talked a lot about positioning and fit, cost & benefit drivers Here, focus a bit more on strategic effects: how do strategic commitments affect rival’s response? Here, focus a bit more on strategic effects: how do strategic commitments affect rival’s response? –Price competition = strategic complements  Direct and strategic effects on profits often go in opposite directions –Lowering MC is tough commitment: negative strategic effect –Lowering benefit is soft commitment: positive strategic effect

ValuJet takeaways: Incumbent’s response to entry Distinguish best response under accommodated entry from predatory pricing Distinguish best response under accommodated entry from predatory pricing Success of either depends on Success of either depends on –Ability to price-discriminate –Capacity constraints –Size of market at the lower end Is there a bigger game? Is there a bigger game? –What effect does outcome have on entry in other markets? –Is the entrant really committed to remaining small?