An Empirical Analysis of the Price and Output Effects of the Southwest/Airtran Merger

Abstract

The 2011 Southwest/AirTran merger is the first between two major low-cost U.S. carriers. This paper investigates the price and output effects of this merger on nonstop routes associated with the carriers prior to their merger. There are four types of routes under consideration: routes with actual, potential, new, and non-overlap competition. The results suggest that while prices increase on routes where actual or potential competition is eliminated, the magnitude of the increase is not statistically different between them. Output, however, decreases about 13 percent on routes with potential competition, but remains unchanged on routes with actual competition. These results suggest that eliminating potential competition has a greater adverse effect on consumers than eliminating actual competition. In addition, there are significant procompetitive effects on routes with new competition by the merging carriers – routes began following the merger. Finally, there is also evidence that routes without competition between the merging carriers prior to their merger also experience an increase in price and reduction in output. Other factors that infl uence the results include the type of route and the identity of the merging carrier.