Effects of Mergers and Divestitures on Airline Fares

Abstract

U.S. antitrust authorities have increasingly forced merging companies to divest assets as a condition for merger approval, with the goal of creating a more competitive postmerger environment. This study examined the effectiveness of this government strategy in the context of the airline industry, in which forced divestitures have occurred in recent consolidations. The study used unique data on assets critical to airport facilities that were involved in the divestitures to document the reallocation of those assets to low-cost carriers. Estimates of the impact of the divestitures on airfares were then calculated. The results show that, at the affected airports, fares for merging carriers fell by 3% and fares for nonmerging carriers fell by 1% relative to airports at which no divestiture occurred. These results provide evidence that the divestiture strategy used by antitrust authorities is effective in this setting in mitigating market power.