On the Reliability of Structural Methods in Merger Review. Evidence from the US Airline Industry

Abstract

The objective of this study is to provide evidence on the accuracy of merger simulation methods, which have become common instruments to evaluate ex-ante the effects of complex transactions. In particular, I study the price effects of one of the most important mergers in the U.S. airline industry, namely the 2013 American Airlines – US Airways merger. Drawing from the theoretical background of the Empirical Industrial Organization, I perform an empirical investigation in three steps. In the first place, I estimate a nested logit demand system. Secondly, I use the retrieved parameters to predict the effects of the merger under scrutiny. Lastly, the forecast is evaluated ex post using data from the period following the transaction, by means of difference-in-differences techniques. Results show that, in this case, simulation methods underpredicted - although not substantially - the increases in prices.