The 2011 Southwest/AirTran merger is the first between two major low-cost U.S. carriers. This paper investigates the price and output effects of this merger on nonstop routes associated with the carriers prior to their merger. There are four types of routes under consideration: routes with actual, potential, new, and non-overlap competition. The results suggest that while prices increase on routes where actual or potential competition is eliminated, the magnitude of the increase is not statistically different between them. Output, however, decreases about 13 percent on routes with potential competition, but remains unchanged on routes with actual competition. These results suggest that eliminating potential competition has a greater adverse effect on consumers than eliminating actual competition. In addition, there are significant procompetitive effects on routes with new competition by the merging carriers – routes began following the merger. Finally, there is also evidence that routes without competition between the merging carriers prior to their merger also experience an increase in price and reduction in output. Other factors that infl uence the results include the type of route and the identity of the merging carrier.
There are both market power and cost efficiency effects associated with airline mergers. Previous studies, however, have primarily focused on merger price effects, which is the net effect of these two forces. This paper attempts to decompose and measure these effects by using a model that allows us to derive proxies for market power and cost efficiency. In particular, we are interested in merger effects in markets where the merging airlines directly competed prior to their merger. We study two main mergers – Delta/Northwest and United/Continental – and find that both increase market power in markets where the merging airlines competed prior to merger. We also find evidence of marginal cost efficiencies associated with both mergers. These efficiency effects are relatively larger than the market power effects and come from different sources. In the case of the Delta/Northwest merger, efficiencies come from markets where the merging airlines competed prior to the merger, whereas in the case of United/Continental, they come from markets where the merging firms did not compete. The market power effects only stem from markets with pre-existing competition among merging airlines, perhaps due to the elimination of a competitor in those markets. These findings, thus, support the long-standing hypothesis that market power and efficiency are important in motivating horizontal mergers.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.