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THE PRICE EFFECT OF ELIMINATING POTENTIAL COMPETITION: EVIDENCE FROM AN AIRLINE MERGER

Authors


  • *The authors gratefully acknowledge comments and assistance from Kamran Dadkhah, Jim Dana, Steve Morrison, Huseyin Mutlu, Craig Peters, Russ Pittman and an Editor of this journal. Earlier versions of this paper were presented at the International Industrial Organization Conference, EARIE, Brandeis University, the University of Amsterdam, the Justice Department Workshop on Competition in the Airline Industry, and the U.K. Competition Commission. We are particularly grateful to Steve Morrison for use of his data. The authors are solely responsible for remaining errors.

Abstract

This paper analyzes the gain in pricing power that a firm achieves by merging with a potential competitor in its market. Using pricing data for the merger of USAir and Piedmont, empirical analysis finds that prices rose by 5.0 to 6.0 per cent on routes that one carrier served and the other was a potential entrant. This was more than half the increase on routes where the two carriers had been direct competitors. Other important factors included carrier size, market concentration, incumbent's identity and the potential entrant's presence at one or both endpoints.

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