Market Power, Efficiencies, and Entry - Evidence from an Airline Merger

The U.S. airline industry has recently experienced a substantial consolidation trend. Three larger and several smaller mergers within the last ten years raise the immediate question after the welfare consequences of these consolidations. Did these mergers cause significant price increases for the final consumers? Or were countervailing factors such as merger efficiencies and entry by competitors strong enough to leave/restore prices at/to pre-merger levels? Answers to these questions are crucial, not only as part of an ex-post evaluation exercise of a particular merger but especially due to the more general insights gained on the workability of competition in the U.S. airline industry. Such knowledge is likely to have positive effects on the quality of future actions by the antitrust authority.

Against this background, we empirically investigate the competitive effects of the merger between Delta Air Lines and Northwest Airlines (2009) in the domestic U.S. airline industry. Applying fixed effects regression models we find that – holding other price determinants constant – the merger led to short term real price increases of about 11 percent on overlapping routes and about 10 percent on routes which experienced a merger-induced switch of the operating carrier. Over a longer period, however, our descriptive analysis reveals that consumers on affected routes are left with an increase of only about 3 percent in real prices. Additional econometric analyses allow the conclusion that both merger efficiencies and postmerger entry by competitors initiated this downward trend in real prices. Our results suggest that competition in the U.S. airline industry is sufficiently strong to mitigate the market power effects of even larger consolidations.

Hüschelrath, Kai and Kathrin Schopen (2012), Market Power, Efficiencies, and Entry - Evidence from an Airline Merger, ZEW Discussion Paper No. 12-070, Mannheim.