Do domestic mergers improve airlines’ international competitiveness?---Theoretical and empirical evidence from China

Abstract

This paper conducts both analytical modeling and empirical analyses to examine whether domestic mergers can improve airlines’ competitiveness in the international market. We first develop a stylized industrial organization (IO) model to specify the underlying economic mechanisms. The analytical results suggest that a domestic airline merger can bring both “synergy” and “scale” effects to promote the merged airline’s international competitiveness, reflected by an increasing route-level market share. The synergy effect comes from a better-coordinated hub functioning to serve international transfer passengers, while the scale effect is from the increased operational efficiency due to the economies of scale on both domestic and international markets after the merger. We then perform difference-in-differences (DID) estimations using the merger of China Eastern and Shanghai Airlines as a quasi-natural experiment. The empirical estimations support our analytical predictions and confirm the existence of both synergy and scale effects. Our analyses and findings call for a more careful and comprehensive government evaluation of domestic airline mergers, as the welfare gain from the international market could be sizable and should also be taken into consideration.