The Functioning of Inter-modal Competition in the Transportation Market: Evidence from the Entry of Low-cost Airlines in Germany

We investigate the entry of low-cost airlines (LCAs) in the German market. The strong competitive pressure of LCAs forced incumbent air and rail operators to reconsider their pricing strategy. Lufthansa reacted by a drastic cut of all prices for all intra-German origin and destinations (O&Ds). The physical conditions of DB, the incumbent railroad operator, made it harder to react. Being an open system, changing the price system on one O&Ds has substantial opportunity costs on other O&Ds in the same rail network. This imposes constraints on price strategies LCA and Lufthansa do not have to satisfy to the same extent.