Access charges, Build-or-buy decisions, L43, L51, L22,

Retrospective studies of horizontal mergers have focused on their price e¤ects, leaving the important question of how mergers a¤ect product quality largely unanswered. This paper empirically investigates this issue for two recent airline mergers: Delta/Northwest and Continental/United. Consistent with the theoretical premise that mergers improve coordination but diminish competitive pressure for quality provision, we …nd: (i) each merger is associated with a quality increase in markets where the merging …rms did not compete pre-merger, but with a quality decrease in markets where they did; and (ii) the quality change can be a U-shaped function of the pre-merger competition intensity. JEL Classi…cation: L13, L93Keywords: Mergers; Product Quality; Airlines.We thank Jan Brueckner, Jiawei Chen, David Neumark, Kevin Roth, and Linda Cohen for very helpful comments and suggestions. We thank Huubinh B. Le for excellent research assistance. Any remaining errors are our own.

C odesharing constitutes a contractual agreement among airlines that allows a carrier, called the "ticketing carrier," to market and sell seats on its partner's plane for segments of a route operated by its partner (the "operating carrier"). "Traditional" codeshare itineraries combine connecting operating services of partner carriers on a given route. For example, in traveling from Denver to Philadelphia, a passenger may buy the codeshare round-trip ticket from United Airlines, but the itinerary involves flying on a United-operated airplane from Denver to Boston, then connecting to a US Airways-operated airplane from Boston to Philadelphia.Codesharing combines the operating services of at least two separate carriers. One of the carriers is responsible for marketing and sets the final price for the entire round-trip ticket, and compensates the other carrier for their operating services on a segment of the trip. It is reasonable to view codesharing as a vertical relationship between upstream and downstream firms. The pure operating carrier is equivalent to an upstream supplier that provides an essential input (operate a trip segment) to the downstream ticketing carrier, who then combines it with complementary trip segments in order to provide the final product to consumers. * Department of Economics, 320 Waters Hall, Kansas State University, Manhattan, KS 66506 (e-mail: gaylep@ ksu.edu). I thank the editor, Robert Porter, and two anonymous referees for very helpful suggestions. I also benefited from invaluable suggestions and comments offered