A Retrospective Study of Recent U.S. Airline Mergers: What Can We Learn from Production Data?

Abstract

I assess the effect of recent U.S. airline mergers on productive efficiency and market power. I recover productivity, markup, and marginal cost estimates for each airline using production and cost data. I then employ these estimates, a panel event study design, and synthetic control methods to estimate the effects of mergers on these outcomes. I find that in most cases, mergers have not significantly affected merging parties’ productive efficiency, and in a few cases, have increased marginal costs. Some mergers, such as the American-US Airways merger, have substantially increased the markups charged. The increase in markups is not explained by efficiencies, proportionally higher fixed costs, or changes in technology (i.e., a larger scale elasticity). Instead, the net profit rate has increased for these carriers after the mergers. Indirect evidence suggests that quality effects cannot account fully for the observed markup changes. Taken together, these findings point to an increase in market power.