Airline Networks, Mergers, and Consumer Welfare

We study the consumer welfare effects of mergers in airline networks. Based on the development of a general classification of affected routes, we apply a difference-indifferences approach to exemplarily investigate the price effects of the America West Airlines (HP) - US Airways (US) merger completed in 2005. In contrast to the existing literature, we do not restrict our analysis to (hub-to-hub or hub-to-spoke) non-stop routes but also consider the price effects of losing competition by low-quality substitutes in the form of one-stop connections.

Our estimations on the route-carrier level show that, across all route types, two years after its completion, the merger led to 6.4 percent higher prices than observed on the comparator routes over the same time frame. However, introducing our classification of routes revealed substantial variation in the merger-induced price effects. While average prices on routes with non-stop overlap were on average 9.4 percent higher than on comparator routes, routes on which the merger eliminated one-stop competition by US showed prices increase of 11.1 percent suggesting that this ‘imperfect substitute’ constrained HP significantly in its pricesetting behavior. Interestingly, we do not find robust evidence for the opposite direction, i.e., the loss of HP one-stop competition is found to leave post-merger prices unaffected on the respective non-stop routes. For the ‘no overlap’ route category, results also diverge. While we find a substantial and highly significant price decrease of on average 8.3 percent on US routes, the corresponding value for the HP routes shows no significant change in average prices. Last but not least, our analysis revealed that – for most route types – average prices of the merging parties and their competitors do not differ significantly from each other; this is found to be true for both price increases and price decreases post-merger.

Hüschelrath, Kai and Kathrin Müller (2013), Airline Networks, Mergers, and Consumer Welfare, ZEW Discussion Paper No. 13-028, Mannheim.