Continental Airlines' much publicized service problems have opened what American Airlines views as a window of opportunity.

American and some other Continental competitors are now betting that people will pay extra to get away from the Texas Air Corp. subsidiary.

The result is the latest, and possibly most serious, challenge to Texas Air's dominance in price setting for the industry: American's decision to raise the price it charges on its deepest discount tickets.

In the past, American and other airlines have withdrawn fare changes in the face of resistance from Continental, which has positioned itself as the industry's low-price leader. This time, "chances are we're going to leave that increase in effect even if Continental doesn't match it," said American spokesman Steve McGregor.

Continental Airlines has not ruled out matching the increase, but had taken no action as of yesterday .

American and other major airlines who have said they will go along with the increase, including United Airlines, Delta and USAir, are betting that they can convince the public to pay a little more for what they are portraying as better service.

"Just as people pay more for a Cadillac than a Yugo, we think people will pay a premium for a carrier that provides good service over a carrier that doesn't," McGregor said.

Along with Eastern Air Lines, another Texas Air Corp. subsidiary, Continental established itself as the industry price leader Jan. 30 when it announced a new deep discount fare -- the MaxSaver. The innovation, which offered the consumer deep discounts in exchange for relinquishing the right to a refund, was quickly and widely copied by the rest of the industry.

Since then, Texas Air has been able to exert considerable control over pricing in the entire industry, torpedoing some price increases by refusing to go along with them and assuring the success of others by assenting to them.

Last week American increased the price of its version of the MaxSaver fares by $10 each way, but only in markets where it doesn't compete head-to-head with Continental. On Oct. 3, that increase is scheduled to go into effect in most of American's other markets, including those where Continental is a competitor. American has also raised its advance purchase requirements for those tickets from seven to 14 days.

In about 20 percent of American's markets, however, instead of increasing fares, American lowered them in response to lower fares by Eastern that are in effect until Dec. 12.

During most of this year, Continental's image for service has taken a beating, partly as a result of the difficulties it has had in combining several different airlines. In February, People Express, New York Air and Frontier were all combined into Continental, a feat that proved more difficult than anticipated. Problems proliferated, particularly at Continental's hub in Newark. But Continental now says most of that is behind it.

After leading the Department of Transportation's tally of airlines that were the target of consumer complaints for seven months, Continental dropped to the number two spot in August. Northwest Airlines, which also has suffered from merger-related problems, took over the top spot.

As the public has become increasingly vocal about the problems of the heavily used, deregulated airline industry, the airlines have been competing vigorously in terms of their images for service.

One American ad features a flying garbage can and the tag line: "If the plane is a mess, what does that tell you about the airline?" It goes on, "Today, some airlines seem more interested in filling planes than cleaning them. In an effort to cut costs, some carriers have cut way back on services ... "

Continental has also embarked on a campaign to persuade the flying public that its service is really better than that of other carriers. The airline created something of a stir in the industry by publishing data on on-time performance that had been exchanged by major carriers. The ad listed Piedmont as tops and Continental as second in overall on-time arrival performance.

If the fare increase that American and other airlines have proposed sticks, and if Continental declines to match it, it will be a test of whether airline passengers perceive a significant difference in service and what they are willing to do about it.

"I think they can get away with a small premium," said Edward Starkman, an airline industry analyst with PaineWebber Inc. On the other hand, he noted, the pricing differential may benefit Continental, which can portray itself "as being the champion of the consumer."

"It's a delicate thing for them," he said. Continental "can stay out there with the lower fares and be the champion of lower fares or go out and raise prices and run the risk of being perceived as offering less service."

Both Continental and Northwest, its successor at the top of the complaint list, are "going to have to be much better than everybody else to be perceived as good," said Dan Bohan, vice president and owner of Omega World Travel, a major Washington area travel agency. Bohan said that he believes that American and other airlines might succeed in charging a higher price by portraying their service as worth the higher price, but he added that both Continental's and Northwest's service are improving.

The other airlines are "spouting a lot of unfounded rhetoric regarding service differentials," said Continental spokesman Bruce Hicks. "We'll see what they do farewise. As the customer learns that there is not the service differential that American would have them believe, I think they will be surprised at the consumer reaction."

The increase in the MaxSaver fare is consistent with the general direction of fares, which has been up.

Faced with increasing fuel prices and bolstered by strong traffic, the airlines have been comfortable raising prices. In addition, fares are increasingly so complex and so targeted to specific markets, that airlines can tinker with fares to increase yields.

Last month both Eastern and Pan American World Airways raised fares on their Washington-to-New York shuttle flights, a market that is generally fairly "price insensitive" because it serves a market made up of passengers whose corporations pay the fare.

Most of the industry has also increased a class of unrestricted, or almost unrestricted, one-way fares called "junk" fares that are generally used by business travelers. Continental has so far not matched that increase, either.

Airlines are also experimenting with changing advance purchase requirements. Delta Air Lines last week moved to reverse the relationship of advance purchase requirements to penalties. At Delta, unlike at other airlines, the lowest penalties (in terms of the percentage of the ticket price that is nonrefundable) are imposed on the tickets purchased most in advance.

The 30-day advance purchase fare, which carries a discount of up to 73 percent from full coach prices, imposes only a 25 percent penalty on a passenger who changes or cancels a reservation. In contrast, a passenger who changes or cancels a booking with a seven-day advance requirement may lose 50 percent of the ticket price.

Not all fares are going up, however. Eastern Air Lines has announced a short-term reduction in its MaxSaver prices for its domestic destinations and has extended MaxSaver discounts to its flights to the Caribbean. A large percentage of the destinations that Eastern serves, including those in Florida and the Carribean, appeal to the leisure traveler more than the business traveler. The leisure traffic market typically is weak in the fall when school resumes, said Eastern's Paula Musto.

Trans World Airlines has declined to match American's increase in MaxSaver fares. "We're not doing it at this point, because some of our key competitors haven't raised them," said Vincent Martinelli, TWA's vice president for domestic pricing. "We don't want to be uncompetitive for the most price-sensitive segment of the market, which are the people who use MaxSaver fares. Continental and Eastern have a substantial amount of service that's competitive with TWA, so if they choose not to, we will not be increasing fares either."