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ValuJet update

ValuJet update. 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

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ValuJet update

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  1. ValuJet update • 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 • 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

  2. ValuJet takeaways:Judo strategy • 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? • By restricting capacity • By making it unattractive for rival’s customers to switch • Lower benefit actually supports ValuJet’s differentiation strategy

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

  4. ValuJet takeaways:Strategic effects • 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? • 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

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

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