Repositioning and market power after airline mergers. (2nd February 2022)

• Record Type: Journal Article
• Authors: Li, Sophia; Mazur, Joe; Park, Yongjoon; Roberts, James; Sweeting, Andrew; Zhang, Jun
• Is Part Of: Rand journal of economics. Volume 53:Number 1(2022)
• Page Start: 166
• Page End: 199
• Publication Date: 2022-02-02
• Subjects: Industrial organization (Economic theory) -- Periodicals; Microeconomics -- Periodicals; Services publics -- Périodiques; Économie industrielle -- Périodiques; Microéconomie -- Périodiques; 338.6
• DOI: 10.1111/1756-2171.12404
• Languages: English
• ISSNs: 0741-6261

Abstract

Abstract: We estimate a model of route‐level competition between airlines who choose whether to offer nonstop or connecting service before setting prices. Airlines have full information about all quality, marginal cost, and fixed cost unobservables throughout the game, so that service choices will be selected on these residuals. We conduct merger simulations that allow for repositioning and account for the selection implied by the model and the data. Accounting for selection materially affects the predicted likelihood of repositioning and the predicted magnitude of post‐merger price changes, and it allows us to match what has been observed after consummated mergers.