Merger with a Maverick Firm: Examining the Coordinated Effects of the AA/USAir Merger

Abstract

This paper studies the coordinated effects of the merger between American Airlines and US Airways by examining the extent to which the connecting prices of the nonmerging legacy carriers (Delta and United) evolved when the merger eliminated Advantage Fares, a connecting flight price discounting program offered by US Airways. In our empirical analysis, we find that postmerger nonmerging legacy carriers substantially increased their connecting flight prices on routes where US Airways had a dominant position, and a similar pattern can be found for the merging carriers on routes where nonmerging legacy carriers had a dominant position. We next conduct a theoretical analysis in which we show that these empirical findings can be explained by the elimination of maverick firms and how such elimination facilitates coordinated conduct among legacy carriers. Finally, we note the potential importance of connecting services in merger analysis in the airline industry.