Merger Analysis with Endogenous Prices and Product Characteristics: Generalized Theorem and Application to the U.S. Airline Industry

Abstract

This paper studies firms' endogenous choices of prices and product characteristics pre- and post-merger. The paper finds that firms' adjustments of post-merger prices and product characteristics depend on pre-merger market shares, net benefits of improving product characteristics (Definition 2.1), overall production efficiencies (Definition 2.2) and threshold market shares that balance marginal cost and markup effects (Definition 2.3). A generalized theorem (Theorem 3.1) is provided to characterize the conditions to predict post-merger outcomes. An application of the 2010 merger of United and Continental Airlines demonstrates that the theorem achieves high prediction accuracy in predicting post-merger outcomes.