Do Horizontal Mergers Induce Entry? Evidence from the U.S. Airline Industry

Merger control has become an important part of antitrust policy in many countries around the world. In an ex-ante assessment of horizontal mergers, antitrust authorities typically have to investigate whether the proposed transaction is likely to lead to a substantial lessening of competition. While the merger as such inevitably leads to an increase in market concentration and is therefore susceptible of increasing both market power and market prices, there are two general countervailing forces: demand-side substitution and supply-side substitution. Demand-side substitution basically refers to the degree consumers would switch to substitutes in case of a price increase post-merger while supply-side substitution assesses whether and how competitors will react to such price increases.

In this note, we contribute to the sparse empirical literature on supply-side reactions to a merger, i.e., we investigate whether competitors increase or decrease their entry activity in the aftermath of an increase in market concentration through merger. In particular, we use route-level data for the America West Airlines – US Airways merger (2005) to investigate whether such an effect can be identified empirically. Our results show that both entry-inducing and entry-dissuading effects can be observed depending on the type of affected route and the carrier under investigation. Interestingly, routes with ex-ante greater competition concerns (i.e., routes in which both merging parties competed directly before the merger) do not show increased entry activity. Our results therefore suggest that entry-inducing effects should be treated with caution in merger assessments by competition authorities thereby supporting the key policy conclusions derived in Werden and Froeb (1998) from a theoretical perspective.

Bougette, Patrice, Kai Hüschelrath and Kathrin Müller (2013), Do Horizontal Mergers Induce Entry? Evidence from the U.S. Airline Industry, ZEW Discussion Paper No. 13-030, Mannheim.