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Market Power and Marginal Cost Effects in Competing Markets: Evidence from Airline Mergers

Author

Listed:
  • Le Huubinh B.

    (Mitchell College of Business, University of South Alabama, 5811 USA Drive South, Mobile, AL 36688, USA)

  • Yimga Jules

    (School of Business, Embry-Riddle Aeronautical University, 3700 Willow Creek Road, Prescott, AZ 86301, USA, Phone: +(928)777-3315, Fax: +(928)777-3827)

Abstract
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.

Suggested Citation

  • Le Huubinh B. & Yimga Jules, 2019. "Market Power and Marginal Cost Effects in Competing Markets: Evidence from Airline Mergers," Review of Network Economics, De Gruyter, vol. 18(2), pages 63-108, June.
    • Handle: RePEc:bpj:rneart:v:18:y:2019:i:2:p:63-108:n:1
    DOI: 10.1515/rne-2018-0024
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    References listed on IDEAS

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    Cited by:

    1. Le, Huubinh B. & Yimga, Jules O., 2023. "Codeshare restrictions as antitrust remedy," Transport Policy, Elsevier, vol. 138(C), pages 17-24.

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    More about this item

    Keywords

    airlines; cost efficiency gains; mergers; market power;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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